Goldsmith comment: Ferris is at the Value Investing Congress in Pasadena, so he asked me to cover for him today. Expect some updates from the conference on Thursday. And for a change of pace, I promise to keep Obama rants out of today's Digest.
As part of the bank stress tests, the Fed is projecting losses of up to 12% on commercial real estate loans over two years. If the Fed is right, the country's banks, which hold $1.8 trillion of commercial real estate debt, would lose $216 billion by the end of 2010.
The ominous forecast isn't news to Sam Zell, who liquidated his enormous commercial real estate holdings in early 2007. According to Zell, "Very few '03 to '07 financings are above water... You have more debt than you have value." As a result, the market for commercial property is frozen. REITs won't sell a property with negative equity... They'd only have to contribute more equity to cover the loan. So troubled REITs are holding out as long as they can, hoping the government's actions will "reflate" property values and rents, helping them cover ballooning interest payments.
So... we have a race between the government's efforts to reflate the property bubble and the coming maturities of commercial real estate loans. Some of the stronger REITs, like Simon Property Group and Kimco Realty, are raising equity hoping to take advantage of the coming bankruptcy sales.
Porter has been following the sector closely since October and will publish his latest research this week in PSIA. If you're not reading Porter's newsletter yet, you can sign up here.
Legg Mason, the Baltimore-based money manager, announced a $325 million loss for the quarter, its fifth straight, and cut its quarterly dividend from 24 cents to three cents. The company has sold $10 billion in structured investment vehicles, or SIVs, from its money funds. (The SIVs have cost $1.69 billion in after-tax losses since November 2007.) Investors withdrew $43.5 billion from Legg's fund in the quarter – assets fell 33% from a year earlier to $632 billion.
Legg is falling behind its major competitors, BlackRock and T. Rowe Price, which had net inflows of $5.6 billion and $4.5 billion, respectively, for the quarter.
"It does not appear that Ford will need a government loan any time soon, if ever," Greenlight Capital founder David Einhorn wrote in a May 1 letter to investors. In the fourth quarter of 2008, Einhorn started buying Ford's distressed debt at an average price of 37 cents on the dollar. That debt was already worth 45 cents on the dollar as of the end of last quarter.
We don't know exactly what debt Einhorn owns. But according to Bloomberg, the only Ford debt currently trading at 45 cents are the 6.625% notes maturing in 2/15/28 and 10/01/28. If this is the debt Einhorn bought, he stands to make nearly 7% a year for 20 years and 170% return on his principal.
New highs: none.
Anything you'd like us to discuss this week? Let us know here... feedback@stansberryresearch.com.
"I am a new subscriber and have yet to form an opinion about your investment expertise. However, I am highly amused and ingratiated by your relentless pursuit of OBAMA!. The role of government in our lives has gotten ridiculous. The level of taxation on anyone with a work ethic is extraordinary and getting rapidly worse.
"I am an ER physician and see firsthand what most people don't... the ravaging effects of social programs on the ethics and morals of dependent individuals. Not only do they lack any sense of self-esteem, they have a raging sense of entitlement. Complaints about care inevitably come from individuals that are not emergencies and have the 'card.' The 'card' of course, is Medicaid, which pays such a ridiculously low amount that it costs the ER money to treat these people. So, who pays? The working insured. Yet another hidden tax. Keep unveiling the truth, even when the unenlightened want to believe otherwise." – Paid-up subscriber John
"I must be missing something. I see a lot of philosophizing and adverts for more newsletters. I don't care that if I had bought Seabridge Gold 4 years ago I would have made 681%. What I want to see is: Buy This. Sell That. I only care about making money and this isn't helping. I will soon be canceling if there aren't significant changes to your S&A Digest." – Anonymous
Goldsmith comment: You'll see plenty of "Buy This" and "Sell That" in our premium products. The Digest is a free letter for our paid subscribers. We use it to update readers on the economy and our current and past positions. As you're aware, we reserve the right to philosophize and blast the government from time to time.
Regards,
Sean Goldsmith
Baltimore, Maryland
May 5, 2009