For the past year, the fate of commercial real estate in the U.S. has been a popular talking point for economic bears. Something like $1.4 trillion in commercial real estate loans comes due in the next 3 years.
Given that a good portion of these properties are underwater, and the fact that banks are still reluctant to lend, the concern that many of these loans won’t get refinancing seems valid.
Already, we have seen companies simply walk away from properties that are losing money, turning the keys over to the banks that hold the mortgages. Maguire Properties (NYSE:MPG) has done it. And we’ve seen BlackRock (NYSE:BLK) and Tishman Speyer Properties abandon Manhattan’s Stuyvesant Tower when the value fell from $5.4 billion to $2 billion.
For shareholders, these moves make sense because it’s better than throwing good money after bad. For Maguire, it was a matter of life or death for the company.
Still, it’s a concern because someone has to step up and buy the impaired real estate from the banks. Otherwise, bank balance sheets are saddled with even more toxic assets, capital bases fall, lending dries up and the whole financial crisis gets repeated again.
Interestingly, it may be the Chinese who help the U.S. out of this commercial real estate problem.
There are several items of positive news on the wire today. Italy’s prime minister and former European Commissioner President Romano Prodi has declared that "[f]or Greece, the problem is completely over…I don’t see any other case now in Europe. I don’t think there is any reason to think the euro system will collapse or will suffer greatly because of Greece."
I know, you’re probably thinking "yeah, right." And I admit, the contrarian in me is asking "what about Spain and Portugal?"
There are clearly issues with the European Union, given the disparity in economic strength between countries like Germany and Greece or Spain. But we have similar disparities here in the U.S.
I’m not ready to believe the debt problems in Europe are gone. But Prodi’s announcement will probably alleviate investors’ concern somewhat. That, in turn, could help the euro make up some ground against the U.S. dollar.
I suppose it’s fitting that futures should be down on the morning of the one-year anniversary of the stock market bottom last year. Perhaps stocks will put in a similar reversal today, but even if they don’t, I think we can take a little selling in stride.
Oil prices are down a bit today as the dollar strengthens. We should note that the dollar and oil have moved higher in tandem lately, proving that there is more to the strength in oil prices than its relationship to the U.S. dollar.
Expectations for the global economic recovery and a subsequent rise in demand for oil are part of it. But I also think that investors are slowly realizing that there is very little upside for production levels in non-OPEC countries.
A recent article about Mexico bears this out. If you don’t know, one of the world’s biggest oil fields, Mexico’s Cantarell, used to produce 2 million barrels of oil day just a few years ago. Now, it doesn’t even give up 500,000 barrels a day.
In January, Mexico posted a 2.65% drop in year-over-year oil production. And January’s production total was the highest in 9 months.
It’s hard to believe that just a year ago, the Dow Industrials were trading around 6,500. It’s easy to look back and see this as an obvious buying opportunity, but it sure didn’t feel that way at the time.
Of course, I was recommending stocks in SmallCapInvestor PRO, because valuations were incredibly low. But I was mitigating the risk by taking profits quickly.
For instance, we took profits on SXC Health Solutions (Nasdaq:SXCI) in April with a 19% gain. That stock has gone on to post some fantastic gains. Conversely, we made a quick 33% on Arena Pharmaceuticals (Nasdaq:ARNA) between March 3 and March 11, 2009. That stock is now much lower than our exit price…
This morning’s payroll data came in better than expected. After economists warned that February snowstorms may have depressed payrolls by as much as 100,000, the 36,000 job losses reported for last month sounds like good news. Well played, sirs, well played.
Now bullish economists are pressing their advantage with statements like this: "We’ve got positive jobs growth in there, we just can’t see it".
Ok, I’ll admit, I’m having a little fun with the economists on this. It’s good news that the unemployment rate is holding at 9.7%. And the fact that economists are close to unanimous in expecting jobs growth this year is also a positive.
*****For some anecdotal evidence of job growth, Bloomberg reports that technology services company Accenture is adding 50,000 workers. Of course, just 9,000 will be hired in the U.S. And the hiring will "spree" will run through August. But still, a year ago, I think we’d all have been happy to know that companies would actually hire people again.
Bloomberg also reports that the service industry hired 24,000 in February and 27,000 in January. 1,000 factory workers were hired in February after 20,000 in January. The biggest areas of weakness remain construction and financial, which lost another 64,000 and 10,000.
Of course, the construction and financial sectors probably added the most workers during the housing bubble, so it’s not a surprise that these two sectors are still adapting.
This must be a first. Citigroup (NYSE:C) CEO Vikram Pandit abandoned the attitude of entitlement that has characterized so many bailed out banks and simply said "Citi owes a debt of gratitude to American taxpayers…We look forward to helping them realize value on that investment."
Let’s not forget, too, that it was Pandit who volunteered to work for a $1 salary while Citi dug itself out of the hole. Meanwhile, other bank CEOs were fighting to keep their multi-million dollar compensation packages coming.
It seems like Pandit is the only one who realizes he’d be out of a job were it not for government bailouts.
*****Of course, it should be noted that several banks didn’t want to accept TARP money. They felt they would be fine and didn’t want to be restricted by TARP requirements. (That means they didn’t want to have to curb compensation.)
Personally, I don’t believe all these banks were fine, especially Bank of America (NYSE:BAC). If BAC was fine, why has it chosen to sell stock and warrants to pay TARP money back? Shouldn’t that TARP cash just be sitting in an account somewhere?
Payroll processing firm ADP reports that private employers cut jobs by 20,000 in February. That reading is in line with expectations. It also is more evidence that the rate of job losses is slowing, or stabilizing.
That’s an important first step for getting actual job growth and putting the economy on a clear path to recovery. But there’s a long way to go before fewer job cuts turns into actual net hiring.
Housing appears to be in "chicken and the egg" territory. Will an improved housing market help employment, or must employment first improve before housing can recover?
Given that much of the housing supply on the market is foreclosed homes, it would seem that affordability is a big issue. Not that prices aren’t cheap, but if you don’t have a job, you can’t buy a house. The only thing that will speed up the rate at which existing housing inventory is worked off is employment. So maybe the housing recovery is the egg.
In early February, stocks looked as though they were breaking down. We had just gotten through the Dubai debt problem. China was raising reserve requirements for banks to slow the rate of lending. And then the news about Greece’s debt problems broke.
The S&P 500 had dropped from January highs at 1,150 to as low as 1,044. That’s a 9% move, and if you recall it was enough to get investors a little nervous. In fact, some were even saying that the global economic rebound was done before it was even a year old.
It was about that time that I started including TradeMaster Daily Stock Alerts’ Jason Cimpl in our daily conversation here at Daily Profit. Jason is the technical analyst and trading strategist for TradeMaster Daily Stock Alert. In other words, he studies buying and selling activity in the financial markets in order to gain an early read on the market’s next move. He’s good at it, and his skill has earned him a few hundred loyal members to his trading service.
You may recall, Jason was bullish in early February. He told us he expected the S&P 500 to move back to 1,085 and eventually move as high as 1,120, where it is today. And of course, he made plenty of upside recommendations to his loyal readers. In fact, out of 13 trades initiated in February, TradeMaster Daily Stock Alert readers made money on 9 of them. That’s a 70% win rate. Total gains were 47%.
I will include commentary from Jason on a regular basis here in Daily Profit. And so you know, he’s expecting more upside. In his own words...
Somebody knows what do about the U.S. dollar rally we’ve seen lately.
A recent regulatory filing with the SEC on February 16 shows that George Soros’ Soros Fund Management has doubled its holdings in the SPDR Gold Trust (NYSE:GLD). Soros is now the 4th biggest investor in GLD. John Paulson’s hedge fund, Paulson & Co. owns the most GLD, with 31.5 million shares.
I discussed Soros gold investment in a recent Daily Profit. Soros believes gold is likely to become a "bubble asset." Low interest rates and concerns about the global economic recovery would be the driving catalysts. But as we know, bubbles occur when buying begets buying.
Gold is currently trading around $1,095 an ounce. Price estimates from Goldman Sachs and HSBC call for gold prices to rise to the $1,235 to $1,300 range. But I think Soros’ position suggests he thinks it could rise even higher than that.
And that’s the thing about bubbles. Once they start, it’s hard to say how high prices can run.
Now, as you know, I’m usually a fundamental investor. I like to buy reasonably valued companies that are taking advantage of important economic or consumer related trends. At the same time, I believe gold should be part of any portfolio, especially now.
The first revision to fourth quarter GDP is out this morning. And amazingly enough, it was revised higher, from 5.7% to 5.9%. This is the first time I can recall a significant piece of data being revised higher in the last year.
Of course, we know that much of the strength in the economy is a direct result of government stimulus policies. Real growth may be running around 2%. But the bottom line is that the government has, and will continue to, support the economy. That should keep us looking for upside for stocks, even though the economy is basically treading water.
*****Investors seem to think it’s now a law that oil and other commodity prices will trade in tandem with the U.S. dollar. In other words, because oil and other commodities are priced in dollars, as the relative value of the dollar falls the price of oil and other commodities will rise.
The relationship makes sense. And for much of last year, it was actually working. But times have changed…
To keep things simple, we’re going to have a look at just two charts today – the U.S. dollar index and the light, sweet crude oil futures chart, the WTIC. As we’ll see, the relationship between oil and the dollar changed in early December 2009.
"There is sometimes a difference between doing what is legal and what is ethical. Goldman Sachs seems to believe that you can do anything that is legal, even if unethical. Thus, they set up AIG to fail. They help Greece defraud the European Union. They sell products into the marketplace and then bet on them failing, when they knew they would fail in the real world.
At some point in time people recognize that they are dealing with unethical, immoral charlatans and they stop doing business with them. If you know your business associates are crooks, eventually you go somewhere else."
I couldn’t agree more. And I also think it is clear why firms like Goldman continue to attract business. It’s greed. I remember when the Bernie Madoff scandal broke. Some of his investors confessed that since his reported returns were so consistently above average, they figured he must be gaming the system. And that actually attracted them, because they wanted a piece of the action, too.
A similar dynamic is in play with Goldman Sachs. Of course, when you play with fire...
There is an article at Slate.com making the rounds in the financial press. Warren Buffett’s partner at Berkshire Hathaway, Charlie Munger, penned a parable about America’s rise and fall, called "Basically, It’s Over."
The article details how a young, fiscally responsible country called Basicland got caught up in the "casino" of speculation, ignored its export economy, and essentially went bankrupt.
While perhaps a bit simplistic, Munger’s piece is intended as a warning about rising government debt and an over-reliance on risky financial speculation. This speculation is intended to make up for the lack of manufacturing as a major component of GDP.
Some of the statistics he throws out are a bit scary. He says "The winnings of the casinos (investment banks) eventually amounted to 25 percent of Basicland’s GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos."
I haven’t verified those numbers, but they certainly suggest an economy that’s out of balance.
An influential German business confidence survey showed a surprise drop in the country, the first in 10 months. A cold winter has apparently hurt retail sales in Germany.
That’s pressuring the euro, and providing strength for the U.S. dollar. It’s been pretty well documented that the euro does not tend to rally alongside the dollar. And that’s what we saw yesterday.
One positive note from yesterday - Maguire Properties rallied off of support at $1.50. Volume was strong and the stock broke above its 50-day moving average. You may recall yesterday, I said the stock needed to rally, and soon. Now, it needs to keep rising.
*****Also yesterday, TradeMaster Daily Stock Alerts‘ Jason Cimpl told us he expects consolidation for the stock market this week. (Consolidation occurs when prices don’t move much as investors adjust to a new price level.)
Yesterday, the S&P 500 traded in a tight 7-point range. And it won’t be surprising if it holds to a similar tight range today. We might anticipate the negative news from Germany to be offset by an improved reading of the Case-Shiller home price index.
It was just last Thursday that we discussed "talking one’s book" and made special mention of George Soros. If you missed that issue of The Daily Profit, talking one’s book means advocating a belief in public that supports one’s trading position, regardless of whether you actually believe it’s true.
So it’s interesting that Soros has a piece in today’s Financial Times where he states that "The survival of Greece would still leave the future of the euro in question." He goes on to say that the aid package for Greece won’t work for Spain, Italy, Portugal or Ireland.
It’s pretty hard to ignore the big news this morning – the Fed hiked the discount rate by a quarter point to 0.75%. Now, this is different from an interest rate hike (known as the federal funds rate). The discount rate is the amount of interest the Fed charges banks for direct loans.
The move is designed to make it more expensive for banks to borrow from the Fed, thereby encouraging them to borrow from private sources.
Now, the Fed said in its last meeting that this move was coming. And I’m actually glad to see the Fed make a "surprise" move. By that I mean the markets got very accustomed to the Greenspan policy of only moving rates during policy meetings. That gives the market time to adjust ahead of the meeting. Some argue that strategy decreases the effect of the move.
With this surprise move, Bernanke has taken the market by surprise and forced it to adjust on the fly. That’s actually a good thing. I think it’s important for the Fed to show that it’s proactive.…
You’ve heard me call out big-name investors who are "talking their book" in the past. An investors is "talking his or her book" when he/she states an opinion as fact for the sole purpose of helping a particular trade.
We’ve seen Warren Buffett do this. Last year, it was widely known that he was massively short the U.S. dollar. And he continued to say he thought the dollar was collapsing, even as it hit important support. Then we learned later that Buffett was covering his dollar short, all the while extolling its weakness.
Obviousl, Buffett, in true P.T. Barnum fashion, was attempting to use his influence to talk the dollar down while he covered. He only needed to fool people for a short time as he exited the trade.
******Last month at the Davos conference in Switzerland, George Soros did his version of talking his book. He made headlines when he said "The ultimate asset bubble is gold."
I always view statements like these with skepticism. And sure, recent SEC filings reveal that at the same time Soros was saying gold was a bubble, his Soros Fund Management was buying 6.2 million shares of the SPDR Gold Trust ETF (NYSE: GLD) for $663 million.
So far this year 15 banks have been closed by the FDIC. Last year, it was 134, if I’m counting the closing figures right as posted on the FDIC website. Some of you may remember the last time there were mass amounts of bank closings during the S&L crisis of the late ‘80s and early ‘90s. At the time, a special agency, the Resolution Trust Corporation (RTC) was set up to dispose of the assets of these banks.
The RTC was controversial because many times it sold assets at prices far below market value. Ultimately though, the RTC succeeded in getting assets seized from insolvent banks into stronger hands. And because some of these "stronger hands" had low cost structures due to low up front costs, a new phase of growth was born.
Bespoke Investment Group is reporting that 10% of U.S. corporations are raising earnings expectations, compared to 4.1% that are lowering them. That’s the largest gap on record, and suggests that analysts still have earnings projections that are too low.
It’s hard to blame the analysts for being cautious. While the economy has improved, uncertainty about unemployment is an issue. It’s easy to imagine that consumer demand could drop. Still, let’s not ignore what corporations are saying. After all, they are the ones in direct communication with their customers. I can’t help but be a little optimistic that there is more upside for the stock market.
*****Don’t ignore the consolidation news from the commercial real estate sector this morning. Mall owner Simon Properties (NYSE: SPG) is offering $10 billion for its rival, General Growth Properties (NYSE: GGP).
Several investors and economists believe commercial real estate will be the next shoe to drop. And within that sector, shopping malls are probably the most beaten down group. That Simon Properties is considering a buyout means that it sees opportunity. And it is moves like these that often mark a bottom for an industry or sector.
I’ve recommended a commercial real estate stock that may have some terrific upside. Maguire Properties (NYSE: MPG) is back to its support level at $1.50. If you didn’t catch it there last time, you might want to give it a look.
My Washington DC office has been vacant all week. It’s amazing to me that record snowfalls have turned my DC staff into shut-ins (and closed the government for the third day) while life goes on at its normal pace here in Vermont.
The snowstorm that’s crippled the mid-Atlantic region will certainly have an impact on 1st quarter GDP. I would expect that 1st quarter retail numbers will be pretty bad. But there could be some good numbers for restaurants coming. The rally in the dollar over the last few weeks has lowered food costs. And I also think that once we see a thaw on the Eastern seaboard, people will shake off their cabin fever with a night out. I know I would...
*****I’m really on the fence with this one: did the Obama administration purposefully wait to attack the unemployment situation? Or is it just dumb luck?
I ask because it’s clear to me that now is the time to strike. If stimulus money had been used at this time last year to help the unemployment situation it wouldn’t have worked. Corporations were still in the process of cutting costs to meet lower demand. And at the time, demand itself was a moving target.
Now that the economy has stabilized, demand is returning and corporate earnings are on the upswing. So corporations are starting to hire again. New jobless claims are down again, as are continuing claims. The unemployment rate has dropped, and on-line employment ads are increasing.
The Dow Industrials cruised past 10,000 yesterday. Clearly, the news that Germany may be coming to Greece’s aid was a big relief for investors. The euro rallied against the U.S. dollar as well, an important catalyst for stock and commodity prices on U.S. exchanges.
Some stability in Europe and progress on a jobs bill in Congress will be good for stocks. Earnings are already solid and I suspect there is more upside coming.
I got on the phone with TradeMaster’s Jason Cimpl to see if yesterday was the type of bullish activity he wanted to see from the market. He noted that although the market got a nice bounce (TradeMaster Daily Stock Alerts members closed short positions worth 15% and 5%), the close was very weak.
Typically, indices in a bull trend would have made a push higher into the close. Despite the weak close and his growing pessimism, he did note that market internals were "spectacular." The advancing volume data showed us that the upward action was more than just shorts covering their downside positions - it was also bottom feeders nibbling at the low stock prices. He’s watching the 1085 level on the S&P 500 as an important resistance point this week...
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