Another major player is reentering the commercial real estate market... Canada's Brookfield Asset Management is preparing a bid to take over the U.S.' second-largest mall owner, General Growth Properties (GGP). Last week, GGP rejected a $10 billion bid (a combination of $3 billion in equity and $7 billion to pay off creditors) from Simon Property Group, the largest U.S. mall owner.
Brookfield's bid would allow GGP to remain a stand-alone company, with Brookfield as the largest shareholder – a structure GGP's current management will undoubtedly prefer. But Brookfield's bid is not as beneficial to GGP's unsecured creditors, which could pose a problem.
Any way you look at it, some of the best real estate investors in the world are buying again – Brookfield, Sam Zell, Manhattan powerhouses. Could be a bottom in high-end commercial properties.
Cheap, distressed real estate assets mean owners and creditors are suffering... Creditors like the entire U.S. retail banking industry, which continues to weaken. The number of troubled U.S. banks climbed nearly 30% to 702 in the last quarter of 2009. The number of banks on the list, which have combined assets of $402.8 billion, is the highest since June 1993.
As more banks become troubled and fail, the government's insolvent deposit insurance scheme looks worse and worse... Reserve ratios at the Federal Deposit Insurance Corp (FDIC) fell to $20.9 billion – down $12.6 billion in the quarter. The FDIC's reserve ratio is now negative 0.39%.
The number of failed banks will continue to pile up on the FDIC's list, because the organization has neither the manpower nor money to shutter them. It's bankrupt. Eventually, the U.S. government will likely step in with another multibillion-dollar bailout, more hair of the dog that mauled us.
I don't need to travel far to see how poorly many banks are doing...
PremierWest Bancorp is a regional bank with its headquarters less than two miles from my house. It's in bad shape. The bank is executing a rights offering, where existing shareholders can buy 3.3 shares for every one they already own. The stock is around 55 cents a share, and the offering is for 44 cents a share. If the offer is fully subscribed, the share count will soar, from less than 28 million to more than 106 million... with the proceeds totaling just $36 million.
As of its most recent quarterly financials, the bank's tangible common equity is less than 4% of assets. If it gets the offering done, it'll still have only a little more than 4% of tangible common equity... that's less than half its nonperforming assets, at more than 8% of total assets.
Like thousands of banks across the country, PremierWest isn't out of the woods yet, not by a long shot.
On the plus side, the assets giving PremierWest and other banks so much trouble are now cheap. U.S. News and World Report ranks Medford, Oregon, among the "10 Cities For Real Estate Steals."
We drove through a well-to-do neighborhood in nearby Jacksonville, Oregon, a couple days ago. We saw homes listed at $350,000 that would have cost twice that a few years ago.
Not far from here, a four-acre lot zoned for commercial real estate has a big new, blazing red sign that says, "Bank Owned. New Price." I bet the new price is lower than the old one. When you drive into downtown Medford, where I buy my kruggerands every month, you see one vacant building after another. It's practically a ghost town.
My wife and I are celebrating our eighth wedding anniversary tonight. We'll drive into town, have zero trouble finding a great parking space right on the street, just a few steps from our favorite new restaurant (Gaetano's), and pay less than $100 for a great meal with all the trimmings and a good bottle of regional wine.
Jeff Clark just booked another huge gain for his Short Report readers. Jeff recently noticed the gold sector was oversold and one of his favorite "buy signals" was flashing. Jeff bought call options on Kinross Gold and closed half the position nine days later for a 92% gain. His readers stopped out of the second half the next day, making an average gain of at least 69% in only 10 days. That's Jeff's seventh big winner this year. His other trades returned 88%, 93%, 106%, 100%, 73%, and 126%. And he produced these returns for Short Report subscribers in a matter of weeks.
This is one of the hottest streaks we've ever seen for Jeff. And it's not too late to take advantage. He recently recommended a new short sale, which he calls "the most favorable short sale setup we'll ever see." And he told readers today he'll release his new, favorite way to play the gold market this week. If you're not trading along with Jeff this year, you're missing out on the biggest gains any Stansberry analyst is producing. To sign up for the S&A Short Report, which we're currently offering at a generous discount, click here...
New highs: Berkshire Hathaway (BRK-A/B), Tejon Ranch (TRC), IMS Health (RX), Jinshan (JIN.TO).
In the mailbag... one reader's thoughtful commemoration of his grandfather. We're grateful he shared it with us... Please send your e-mails to feedback@stansberryresearch.com.
"I wanted to pass along a note that my Grandfather sent to me and my Dad towards the end of January.
It is disturbing when an analyst the stature of Stansberry comes right out and says GE is a sham. AIG is peanuts compared to the real size of GE. GE capital probably holds more derivitives then everyone else combined.
I don't believe the financial world could handle a GE meltdown.
Sure. But I also expect corporate bond failures. And there are other things out there. As Porter Stansberry (whose style as an analyst I really like) has pointed out, General Electric – which is really just a hedge fund disguised as an industrial concern at this point – is leveraged thirty to one. It's a dead man walking. It's the next AIG. When something like that happens, it really shakes Wall Street to its foundations.
"We lost my Grandfather last Friday (Feb 19) to lung cancer at the age of 82. In my eyes and the eyes of the rest of my family he was a great man with steadfast principles and an intelligent opinion on nearly every subject. Luckily for me I was able to spend a considerable amount of time with him over the Thanksgiving holiday. As a child he used to entertain me and my siblings for hours with stories about his childhood and his life. He loved life, he loved his family, he loved ideas (about nearly anything as long as they were positive and constructive) and most of all he loved seeing those ideas put into action.
"The last conversation that me and my sister had with him, just sitting with him and my Grandmother and listening to the two of them talk for nearly three hours will certainly be one of the more memorable moments over the rest of my life.
"I have been an Alliance member for a year now and in that time period you and the other analysts of Stansberry and Associates have shared intimate and personal moments of your lives and the lives of your families with us, so I wanted to share this note with you and a little something to help carry on the legacy of my Grandfather.
"I can't do justice to my Grandfather, to his accomplishments in life, or to the respect that me and my family held for him in a single e-mail. But I would like to share with you one of the last e-mails that I received from him and let you know that he had a very high regard for the work that you do, and I can say with considerable experience that he was not an easy man to please. I can only hope that everyone has or had such a positive role model in their lives. For me and my family we will always recall with fondness, the kindness, compassion and wisdom that my Grandfather bestowed upon us." – Paid-up subscriber Billy
"The yearly report card is one of the primary reasons I became an Alliance member. I am strong believer in honest introspection and continual improvement. Everyone should be doing this exercise if they have any interest in driving improved performance in either their personal or professional lives. In an era where everyone has become an expert and accountability gets glossed over or mistakes get explained away it is refreshing to see someone put their reputation on the line and call it like they see it.
"I personally think your assessment of PSIA was a bit too harsh. The issue you ran in the fall on the 7 secrets of the worlds greatest investors was one of the best pieces I have ever read. It should be sent out as a introduction to Stansberry Research for all new subscribers. This issue alone should be graded as extra credit raising your grade to a 'B.' Keep up the good work." – Paid-up subscriber Mike O.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
February 23, 2010