GM's customers are getting a taste of what its shareholders have endured. Being insolvent is bad enough, but now GM has recalled 1.5 million vehicles due to potential engine fires. There haven't been any reports of fires, but the government – GM's new partner – says oil dripping into the exhaust system could ignite. What's that old '60s song about letting it burn?
Last month, Boston's John Hancock Tower – which sold for about 50% of its previous purchase price after the owner defaulted on its loan – showed us the extent of the damage in U.S. commercial real estate. Now, maybe we'll see the damage spread around the world... HSBC plans to sell office buildings in Paris and New York, as well as its headquarters in London's swanky Canary Wharf district.
HSBC sold its headquarters for over a billion British pounds at the height of the U.K. property boom in early 2007... only to buy it back` a year and a half later for roughly 25% less. HSBC had to sell $18 billion worth of stock and cut its dividend just last week, so we know it's simply in panic mode. HSBC operations occupy 10,000 buildings worldwide, encompassing 78 million square feet.
Commercial property is one of the shoes we believe has yet to drop in the ongoing global credit crisis... and I expect it'll fall hard on the foot of the life insurance industry. Life insurance companies have about 10% of their investment portfolios in direct commercial real estate commitments. MetLife has $36 billion in commercial real estate and a little over half that in tangible equity. A 25% writedown to its commercial real estate loans could obliterate almost 50% of tangible equity.
MetLife says it will not take any government bailout money, though. It sold $2.3 billion of equity last October and refinanced $1 billion of debt earlier this year. MetLife owns a federally chartered bank holding company, one of the 19 largest such institutions undergoing a government stress test.
Office buildings aren't the only deals in trouble. Apartments aren't the wonderful investment they were purported to be, either. Vacancies in the top 79 U.S. apartment markets rose last quarter to an average 7.2%, the highest level since the first quarter of 2004. Vacancies rose despite rents having fallen more than at any time since 1999, as far as data goes back.
There's no such thing as a recession-proof investment. A recent Barron's article on a waste-removal stock said something like, "They can't stop picking up the trash." Anyone who's ever been to a U.S. city in the past decade or two knows trash can pile up just like anything else. If you can cut back on the amount of food you eat and the water you use, is anything truly "recession-proof"?
Goldman Sachs has decided its shareholders will bail out taxpayers. It's selling $5 billion worth of stock, saying it wants to use the proceeds to pay off the $10 billion in TARP money it received.
Goldman's mysterious black box – its fixed-income, currency, and commodities trading division – generated 70% of its net revenue last quarter. Goldman reported $1.81 billion in earnings... even though it received bailouts via direct participation in government programs and through the backdoor, by getting $13 billion in counterparty payments from AIG. This must be a massive accounting fraud. How can Goldman report profits when it's taking tens of billions in bailouts?
That same sentiment is expressed eloquently in a recent Barron's interview with William Black, an academic who understands the crisis and the government's horrible botching of it. Black pointed out the inconvenient inconsistencies in the government's response to the crisis:
We have lost the ability to be blunt. Now we have a situation where Treasury Secretary Geithner can speak of a $2 trillion hole in the banking system, at the same time all the major banks report they are well-capitalized. And you have seen no regulatory action against what amounts to a $2 trillion accounting fraud.
I've been crowing about the insolvency built into our banking system, and telling everyone they're insane to buy big bank stocks, since the big banks are so complicated that no one inside or outside of them could possibly know their intrinsic value. Black, when asked to summarize the problems, said, "With most of America's biggest banks insolvent, you have, in essence, a multitrillion dollar cover-up by publicly traded entities, which amounts to felony securities fraud on a massive scale."
It's rare to find someone with the experience and insight to understand what's going on... who can also express it in plain English.
Echoing my own view that bottoms don't feel nearly this good, octogenarian market sage Richard Russell, of the excellent Dow Theory Letters, recently argued that when the S&P 500 and the Dow are cheap, they're selling for less than 10 times earnings and yielding 5%-6%. So... trading at 25-28 times earnings and yielding 3% or so, like right now, doesn't quite get us to a bottom-like valuation.
This morning, biotech company Dendreon reported positive results from the Phase III trial of Provenge, its prostate cancer vaccine. The stock shot up 140%.
The excellent results actually caught our biotech analyst George Huang off guard: He didn't have much hope for Provenge... Fortunately, he had structured a trade for S&A FDA Report readers set to profit no matter which way the trial went. And this morning, his subscribers cashed out half their position at more than a double in about two months. They're riding the other half for a 300%+ gain.
It's too late to get into Dendreon, but George has already moved on to the next big biotech trades. His latest issue of the FDA Report (out tomorrow after the market closes) covers two "free money" opportu
nities in the pharmaceutical sector. These low-risk bets should both bring in about 50% in six months or less.
George put on similar trades three times last year, and profited every time, collecting one double and two 50% gainers. If you'd like to receive George's newest report, click here.
New highs: none.
Please write and tell us how we're talking about politics too much... or maybe you can find and object to something really stupid I've said (shouldn't be too hard): feedback@stansberryresearch.com.
"I don't get it, I really don't! With all the adverse stats that PSIA & The S&A Digest state constantly in print, how does Goldman Sachs get away with fudged #'s? Why aren't they req'd to come clean, who the hell are these crooks anyway? When I slaved for crumbs on Wall St., Goldie was considered t/b a quality house, yeah right! In no time two things became very clear (I was with Cargill, PaineWeber & a couple of smaller boutique firms during the '80's) first the Goldman guys put their pants on one leg at a time just as I & my trading team did. Secondly, their 'insider's influence' was becoming more apparent, even then. Today we now know how crooked they've always been & I want to join you guys in exposing them fully, I'm dead serious. I have a little used blog or two, just help give me the direction we need to pursue." –Paid-up subscriber J.S.
"People get offended when I tell them that I suspect that the average America IQ has slipped 50 points in the last 30 years. I don't care. Unfortuneatly the average American seems to hold on to a new age religious belief that if you think the world is ok, it will be, and get upset at you, call you an idiot, if you dare to disagree. It doesn't change anything. Your job is to research and report things, all kind of things. If you find something that makes people uncomfortable, thats not your fault, report it. If that means something in politics, that's your job, report it. What ever it is that you find, your job is to report it. If somebody does not like reality, that's their problem not yours, report it anyway. Report the truth, let the chips fall where they may. If they don't like it they can go find somebody who will feed them pleasant things, and probably will anyways. There is no helping somebody who refuses to accept reality as just that. We want the truth, not what we hope to hear. In my book you're doing a bang up job." – Paid-up subscriber K.B.
Regards,
Dan Ferris
Medford, Oregon
April 14, 2009