The Christmas bust for retail is another reason to be very cautious about commercial real estate... According to new data from Deutsche Bank, delinquencies on commercial mortgages packaged and sold as bonds (commercial-mortgage backed securities, or CMBS) nearly doubled in the past three months. CMBS prices already reflect a downturn greater than in the 1990s, when commercial mortgage default rates exceeded 30%. In my newsletter last month, I listed nearly a dozen commercial-real estate firms whose rental income will not cover their interest payments and whose debts exceeds the value of their equity. It's going to be a complete wipeout...
Portfolio magazine ran a pretty good article on billionaire hedge-fund manager John Paulson, and the best part is short-seller Jim Chanos' recollection of a phone call with Bear Stearns CEO Alan Schwartz...
Chanos, for one, is tired of the blame-the-shorts litany, and he recalls a conversation with Bear Stearns' Schwartz to make his point.
The day before the Fed's rescue of Bear Stearns, Chanos says he was walking to the Post House restaurant in New York City, when, at 6:15 p.m., his cell phone rang. He saw the Bear Stearns exchange come up on his caller ID and took the call.
"Jim, hi, it's Alan Schwartz."
"Hi, Alan."
"Well, Jim, we really appreciate your business and your staying with us. I'd like you to think about going on CNBC tomorrow morning, on Squawk Box, and telling everybody you still are a client, you have money on deposit, and everything's fine."
"Alan, how do I know everything's fine? Is everything fine?"
"Jim, we're going to report record earnings on Monday morning."
"Alan, you just made me an insider. I didn't ask for that information, and I don't think that's going to be relevant anyway. Based on what I understand, people are reducing their margin balances with you, and that's resulting in a funding squeeze."
"Well, yes, to some extent, but we should be fine."
"This is now 6:15 on Thursday night, the night before the collapse," Chanos says. "It was after a meeting with [Bear Stearns CFO Sam] Molinaro who basically told him at that meeting, 'We're done. We're gone. We need money overnight we don't have.' So here he is, calling one of his biggest clients to go on CNBC the next morning to say everything's fine when clearly it's not. And he knew it wasn't."
Chanos refused to go on CNBC. By 6:30 the next morning, word was out that the Fed was engineering the rescue of Bear Stearns. Chanos realized he could have been on CNBC while that was announced. "I thought, That f
"So here it is," Chanos says. "Alan Schwartz takes the position 'Short-sellers were our problem,' and who did he try to get to vouch for him on the morning of the collapse? The largest short-seller in the world. You want to talk about ethics and who's telling the truth on these things? It's unbelievable."
"We will end up with a bank, there is no doubt about that," said billionaire investor Wilbur Ross. Ross has been talking about buying a bank throughout the credit crisis, but so far has only invested $6 million in the KBW Regional Banking exchange-traded fund (KRE) – as of last November. He says his plans to buy a bank were delayed after the government started bailing out banks. Ross says he might look to buy a commercial bank or thrift in six to 12 months.
Keep your eye on private-equity firms like Wilbur Ross' if you want to see how big business and big government collude to rob the taxpayer. These institutions will buy the bank assets for pennies on the dollar and then force the government to make good on the bad loans. In three or four years, when the crisis is over and the assets are fully valued, the private investors cash out – making 50 or more times their investment. Then... maybe a few more years later... the politicians who set up these deals end up in high-paying jobs working for guess whom?
New highs: Crucell (CRXL).
In the mailbag... more on Monday's review of the TARP program and Corus Bank. Send us your thoughts: feedback@stansberryresearch.com.
"I am a Community Bank Banker and [TARP] is the worst program ever conceived. If they are too big to fail, then they should not have been allowed to merge with other banks to get to their current size... and the greed to pump up profits (and bonuses) caused the mess. Where was the risk assessment? They should be allowed to fail and other well-managed banks would pick up the pieces..." – Paid-up subscriber DR
"I was surprised to over hear a couple of employees talking today about housing in Detroit and through out Michigan. It apparently has hit the news wires that you can get property and houses for only thousands of dollars. I stepped in and added, that not only that, but most housing in Detroit is rented and covered by Low Income Gvt sponsorship (via Stansberry info). Where I live in Washington State, a property management firm only cost me 10% to manage my rental condo. They take care of tenant screening, contracts, payment, and maintenance (you pay,
but they take the calls and provide the repairman.) In that light, the profit margin on a rental with a 30-year mortgage is huge, or you pay cash and the property pays for itself in less than a year. Now I ask, since this opportunity news is now mainstream, what does it mean? Is the bottom near, or will it take longer for the past 20 years of real estate boom to wash out of our system? I am from the Seattle area, which has seen real estate sky rocket since the late eighties. Is this a sign of a bottom, or a sign that true fear has yet to set in? Am I looking through a skewed glass that the success of Microsoft and other major companies have laid over the Northwest?" – Paid-up subscriber Derek Metzer
"I started my FDA Report subscription last April. Due to mostly bad experiences with biotechs in the past, I took cautiously small positions in Dr. Huang's recommendations. When I got the notice in December that my FDA Report would be auto-renewed in January, I wasn't too happy because I had just paid for subscriptions to True Income and Put Strategy, and the returns on FDA weren't that impressive on an absolute basis (I cherry-picked). On the other hand, relative to the general market slaughter that went on, the FDA results were a bright spot in my overall portfolio. Still, I called your office to request cancellation of my FDA auto-renewal. Then Indevus happened. I had bought an initial stake, didn't do the covered call because the premium wasn't that attractive, and IDEV was creeping up due to some good news events. Patience and luck paid off with the IDEV acquisition announced earlier this week. I sold my stake for a 186% gain. The profit was more than enough to pay for another year of FDA, so I called your office yesterday to restore auto-renewal. With each profitable trade, my confidence gains in Dr. Huang's insights and analysis of the biotech arena. I'm expecting even better returns from FDA in the coming year." – Paid-up subscriber Harry C.
Porter comment: Our traders have done very well lately – George made a lot of money for his FDA Report subscribers in the past year. And the returns we've made selling puts in my Put Strategy Report are so outrageous that if I told you them I'm sure you wouldn't believe me. Out of the eight puts we recommended selling in October and November, seven made a profit. And on half of these positions, we'll record gains of 100% when the options expire next week.
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Regards,
Porter Stansberry
Baltimore, Maryland
January 9, 2009