Friday, July 30, 2010


Just a few notes before I head off for a little R&R for a few days.

GDP for Q2 came in at 2.4%.  The majority of the growth seen in the report was mainly increased government spending and inventory builds as manufacturers ramp up inventories to get ready for our incredible economic recovery(good luck with that!).

The reality here is that the consumer continues to sit on the sidelines.  If you take a look at the consumer growth index it confirms the continued slowing of the US consumer:

My Take:

As you can see above, the distortion between the BEA's GDP growth and the actual private consumer demand in the economy has never been larger in the past few years.  This does not bode well for the future.

If this trend continues, manufacturers will slash production as the expected recovery never materializes.

The Chicago PMI came in higher than anticipated which shouldn't be a surprise when you look at the inventory builds in the GDP number.  The builds were responsible for about 50% of the GDP growth in the quarter..

Q1 GDP was revised downward to 2.7% from 3.2%(what a shocker).

So let's recap here:

The last three quarters of GDP growth are 5.6% in Q4 2009, 2.7% in Q1 2010, and 2.4% for Q2 2010.  Anyone noticing a trend here?

This is one heck of an impressive recovery!(scarcasm off)

The Bottom Line

The GDP numbers are pretty much a joke at this point.  The bottom line here is private demand is nowhere to be found.  The market was down on this report but has since rallied after better than expected Chicago PMI and consumer sentiment reports.

I don't see this holding by the close.  We probably end the day flat give or take a few points.  Wouldn't be shocked if we ended down pretty sharply.  The bond market read right through the BS filled GDP report.

Yields once again plummeted below 3% on the 10 year this morning.

Folks, if the economic recovery doesn't take hold companies will slash inventories which will most likely put GDP back in the red and into a recession. 

The leading indicators on the consumer show that demand has once again fallen off a cliff as seen by the chart above.

All I can say here is don't believe the hype and raise cash!

Disclosure:  No new positions taken at the time of publication.

Wednesday, July 28, 2010

Mayor Booker Gets It but Washington DC Doesn't

I meant to share this a few days ago.  Take a good look into Mayor Booker's eyes in this video.

Time and money are running out, and the challenges that Mayor Booker faces right now in Newark will be seen all across this country as our deficits continue to spiral out of control.

Expect to see this at a theatre near you folks. There will be less police, less firemen, and fewer social services available as the states struggle to survive as a result of this fiscal crisis.

Taxes will soar and foreclosures will soon follow as fiscal reality slaps us right in the face.

Bubblevision and the puppets in DC will continue to tell you that we are in the middle of an economic recovery.

The facts say otherwise.  Just look at the news flow today:

Durable goods were down for the second straight month.

The Fed's Beige Book says that the economic recovery has slowed in some areas.

Gov. Schwarzenegger Declares State of Emergency, Issues
Executive Order to Impose Furloughs Due to Cash Crisis Caused By
Budget Impasse.

Local Governments to fire 500,000 in the coming year.

Quick Take:

How do they tell us the economy is recovering with a straight face when the news flow looks like this almost everyday?

Folks, Rome is BURNING.  Look at Mayor Booker....He looks like he has seen a ghost. 

I can guarantee you that behind closed doors most state governors look just like him. 

This disaster is spiralling out of control and yet the money continues to flow to mainly Wall St vs. Main St.  You would think that the government would have learned by now that this policy has been a catastrophic failure.

I suggest that all of you read PIMCO's Bill Gross's take on the economy in his August outlook that came out today.  He was highly critical of the governments response to the financial crisis.

"PIMCO’s continuing New Normal thesis of deleveraging, reregulation and deglobalization produces structural headwinds that lead to lower economic growth as well as half-sized asset returns when compared to historical averages. The New Normal will not be aided nor abetted by a slower-growing population nor by cyclical policy errors that thrust Keynesian consumption remedies on a declining consumer base. Current deficit spending that seeks to maintain an artificially high percentage of consumer spending can be compared to flushing money down an economic toilet. Far better to create and mimic other government industrial policies aimed at infrastructure, clean energy, more relevant education and less costly healthcare services. Until we do, policymakers will continue to wave their hands in front of the electronic eye – waiting for the flush, waiting for the flush, waiting for the flush, with very little success. Try another way, Washington. El-Erian, Sachs and other 21st century policy thinkers have a better way to push the handle.

William H. Gross

Managing Director"

Take Continued

Bill Gross is the smartest guy out there folks IMO.  He is also often called upon by our government when they needs help.  His August note was astonishing to me because of these close ties.  I have NEVER seen him this critical of the policy in this country and it is something to take note of.

It's really amazing to me:  Everyone seems to "get it" except the people that matter down in DC. 

It's easy to see why they don't:

The idea that they must make unpopular decisions that could impact the elite and other special interest groups in this country is far too much for them to fathom.

Extend and pretend is a far easier game to play because no one gets offendes.  This approach is an easy choice because it  increases the chances of re-election which is of course is all anyone really cares about when it comes to being a politician.

The problem with this policy is the country is going to go down the drain in the process because it's NOT working!

Let me vent here for the moment with a few questions.  :

How bad do things need to get in order for them to get it?

How many more people have to lose their homes?

How many more jobs must be lost?

How deep in debt do we need to go?

How many states must declare bankruptcy?

The Bottom Line

We are doomed unless someone is ready to "man up" in Washington and demand real change.

What angers me here is we are not getting any help from the press.  We need their help because America for whatever reason is not willing to stand up and do it themselves.
I turn on the news everyday and I am baffled at how clueless the media is. 

I am starting to believe that everyone in this country has been brainwashed by the 25 years of prosperity we have seen since the last real recession in this country.

Day after day we are bombarded with "happy days are here again" sound bites that make me want to just vomit when you see what's really going on out there.

The press has turned into a nothing but a bunch of Pollyanna's. 

It's time for this country to get their heads out of the sand and realize that there are a lot of sacrifices that need to be taken over the next 10-20 years before we see anything close to the prosperity we have enjoyed since the early '80's.

People must realize that a new normal has now taken control.  The days of 10% annual returns in the stock market are OVER.

Prices on all assets will be dropping for several years as deleveraging takes place throughout the economy.

The days of having 2 SUV's in the driveway, owning a McMansion, and taking two vacations a year are a thing of the past.

Moving forward you will no longer be able to afford to send your kid to a $40,000 a year liberal arts school for an average education.

The faster we all accept these ideals the better off this country will be.

It's time for us to stop living in the PAST and start living in the FUTURE

The Fed and the rest of the puppets in DC should be the first ones in line when it comes to making this change because the country is on the cusp of collapsing as we continue to try and hold on to a standard of living that is fiscally unsustainable.

It's time to put away the wallets Washington before the bond market does it for you.

Disclosure:  Sold 50% of my long holdings in Momenta Pharmaceuticals.

Tuesday, July 27, 2010

Commercial Real Estate Armageddon On The Way?

Well this was interesting to watch:

A few quotes from the article before I comment:

"In the early 90's when the financial downturn happened you had the RTC (Resolution Trust Corporation), which the FDIC (Federal Deposit Insurance Corporation) set up. The RTC was taking "all these bad banks and then throwing the paper at discounts, and people were buying them at cents on the dollar," the CEO said.

"This used to be the blood on the streets" in the commercial real estate market, Rechler said, adding, "this happened quickly," he said.

But today it's not just about the debt, "they actually have to inject equity," Rechler said.

If you look at the CMBS (commercial mortgage-backed securities) over the next five years, "about 65 percent of the debt" will be maturing. "You can't replace the same amount of debt in today's market with the amount of debt that is maturing—its going to need more equity," he concluded."

My Take:

Scott Rechler pretty much nails it here.

The numbers here are staggering. 

As you can see above in the video, the commercial securitization market has just about disappeared.  There were only $17 billion in commercial seceritizations done from 2008-2010 versus a whopping $602 billion fom 2005-2007

Based on Rechler's calculations 65% of the loans are about to mature.

As Rechler explains, most commercial loans come to duration in 5 years.  Some need to be rolled over in as little as 1-2 years.

Based on the numbers above,  this means about $400 billion in commercial loans needs to be rolled from 2010-2012.  This total could be a little higher if some of the 2004 loans are included.

The issue we have here is the properties included in these securitizations are worth way less today then they were when they were securitized in 2005-2007. 

This is a huge problem because the banks will not roll over the loans because the commercial property values have collapsed since the paper was written.

As a result, they will demand cash from the developers before they allow them to roll over the debt, and there is no way that the developers have the billions of dollars that are needed in order to make up the difference.

This means that all of these commercial securitizations are likely worth pennies on the dollar just as Rechler describes above when this last happened in the early 1990's. 

The Bottom Line

It's time to pay the piper in commercial real estate.

We can still play "extend and pretend" in housing because they are 30 year loans.

Commercial real estate unfortunately doesn't have this luxury because the loans are all much shorter in duration(5 years or less).. 

The banks are going to take huge losses on these securitizations because they aren't going to roll over overvalued paper, and they have ran out of suckers to sell this CMBS garbage to unless they want to unload for .10 on the dollar.

The only way out here is a bailout and I don't see this happening in the current political environment.

Like I have said before:  Extend and pretend can only last so long before the whole things blows up.  Fraudulent accounting is all well and good until loans actually need to be rolled over or paid back. 

Sit back and enjoy watching "Commercial Armageddon" over the next few years.  Things have just gotten started.

Disclosure:  No new positions at the time of publication.


Monday, July 26, 2010

Ignore Today's Housing Bulls: The June data wasn't pretty

If you watched bubblevision or read some bulltard article on the internet today you might have seen a headline similar to this:


May revised down to 267,000"

My Take

OK, let's put this into perspective.  The May number was the worst on record at the previously estimated 300,000 number that we got last month.  As you can see this was revised downward significantly.
The June sales of 330,000 was the worst June in history ever since they started recording this statistic in 1963.  Comparing May to June is essentially meaningless because home sales fluctuate depending on what time of the year it is.  
You must compare month versus the same month from the previous year in order to see an accurate number.
So home sales were not up 24%.  They were up versus May which is a meaningless statistic. 
If you look June's numbers and put them in perspective they look flat out disastrous:
The Bottom Line
If the numbers stay here for several more months you are eventually going to see a panic where everyone runs for the exit selling at whatever price they can (that is if they have the cash to short sell the house).
I will repeat:  Now is not the time to buy a house.  Anyone who is trying to push you into doing so is not looking out for you. 
I hear a lot of Realtors are out there telling buyers that "now is the time to buy" because interest rates are the lowest they have ever been in history.
Folks, this is the worst advice anyone could give you. A credit trader friend of mine made a great point on the whole low rate borrowing scam.
He asked me a question:  "Jeff, if you buy at the lowest rates in history how do you ever have home appreciation?".
I then asked him "What do you mean?".  He replied "Think about it, rates can only move one way going forward over the longer term and that is higher".  He then added "What happens to the home prices when rates are going against you?".
It instantly clicked.  You gotta love the bond boys because they are so good at putting things into perspective.

So basically if you buy now using historically low rates you are GUARANTEED to lose money down the road because rates will be higher when you go to sell it.  
As our issues around are deficit continue to mount higher interest rates are a virtual certainty over the longer term.
Housing is still an investment that one can still make:  The problem is this time it's a guaranteed loser instead of the winner it was from 2002-2006. 
Buyer Beware.
Disclosure:  No new positions taken at the time of publication.