WSJ bearish on commercial real estate... Building your 'Retirement Lifeboat'... Big firms rushing for cash... Price hike at Casey Research...Editor's note: Porter is off The Digest this week. He'll be back next week.
The Wall Street Journal is a little late to the party... Dan Ferris first told Extreme Value readers of the coming collapse in the commercial real estate (CRE) market this March. He said the massive leverage and billions of dollars of overvalued CRE on financial institutions' balance sheets would surely lead to massive writedowns and dissolving equity.
The Journal, with its headline, Commercial Real Estate Lurks as Next Potential Mortgage Crisis, is just now touching on the topic. The article notes the looming problems in the $700 billion commercial-mortgage-backed securities (CMBS) market and soaring delinquency rate – 3.14% in July, up more than sixfold from a year ago.
The problems in the CMBS market are twofold. One is simply bad underwriting – loose credit and soaring real estate prices spurred banks to make cheap loans on bad properties. The other problem is property owners' inability to refinance loans. By 2012, $153 billion of loans that make up CMBS are coming due, and some $100 billion will face difficulties in refinancing.
Even though cash flows from many of the buildings are enough to pay interest and principal on the debt, the values of the buildings have fallen so far (many premier buildings have fallen in price by 50% or more) that borrowers won't be able to extend their debt or refinance. And because CMBSes are comprised of hundreds of commercial real estate loans that have been chopped up and sold to numerous investors, it's difficult for property owners to discover who actually owns their mortgage and contact them for debt negotiations.
Now that the mainstream media is picking up the CRE disaster story, more investors will start betting against financial companies with big CRE exposure... And it will be easier for us to make money on the short side. For a list of U.S. financial institutions with the largest exposure to commercial real estate, click here.
In this month's Retirement Millionaire, entitled How to Build Your Retirement Lifeboat, Doc Eifrig outlines a few steps you should take to protect your wealth from the greedy government. Eifrig shares his favorite offshore bank, a way to legally own assets abroad without reporting them to the government, and his favorite way to own gold. The money this one report will save you in the coming years far outweighs the $39 subscription fee. To sign up for Retirement Millionaire, and begin building your Retirement Lifeboat, click here...
In the August 25, 2009 Digest, we outlined how sound businesses are using the recession to crush their competition. For example, Bed Bath & Beyond used heavy discounts in select areas to force Linens 'n Things out of business. Today, the Journal reports large businesses (those with annual revenue above $5 billion) are also using their size to aggressively collect cash from customers while delaying their own bill payments.
"Big firms can force their terms on suppliers and customers. And if you're a small business or a small store in a mall, you have no bargaining power and have to take what's given, which is not much today," said Sung Won Sohn, a former chief economist at Wells Fargo and current teacher at California State University, Channel Islands.
One example is Anheuser-Busch, which told suppliers it would take up to 120 days to pay its bills from 30 days previously. General Electric freed up $3.8 billion in cash last quarter by speeding up its cash collections, collecting past-due accounts, and delaying its payments.
Companies with more than $5 billion in annual revenue took an average 55.8 days to pay suppliers in the second quarter, up from 53.2 days a year earlier. And they collected payments faster, taking an average 41 days from 41.9 days a year earlier. Meanwhile, businesses with less than $500 million in sales paid vendors in 40.1 days, down from 42.9 a year earlier. And they took 8% longer to collect payment.
The companies this article outlines are perfect examples of Dan Ferris' World Dominators. These financially secure, dominant companies can depend on their size to gain market share during the recession. We doubt you could find any safer equities right now. To learn more about Extreme Value and access Dan's invaluable list, click here...
Our friends at Casey Research, Doug Casey's publishing company, are raising their prices across the board, starting at midnight tonight. So today is your last chance to get some of the world's best junior mining and natural resource research for only $179... Tomorrow, the price will increase to nearly $1,000. To learn more, click here.
New highs: PowerShares Insured National Muni Bond (PZA), Markel (MKV).
More guns and gold in the mailbag. What are you doing to prepare for economic apocalypse? feedback@stansberryresearch.com.
"Why not just buy the gun and forget the gold, with the gun you can collect all you need in case of a total breakdown of our financial system. Why does an economy need gold to function? Ever heard of barter as the foundation of an economy before gold or money as an exchange medium? Gold's appeal is based on its universal acceptance, which itself is based on trust in a useless metal. At least the stone from the quarry can put a roof over my head. Paper money makes a nice fire to keep you warm or cook you a meal, what does gold do, except look shiny. The foundation of an economy, in my book, is trust. Trust in your ability to offer a service or produce a wanted good and trust in that the counter party rewards you fairly." – Paid-up subscriber Erich
"I find it ironic that everyone buys gold to 'protect' themselves financially, they bury it in the backyard and now are talking about 'protecting' the gold with their Smith and Wesson. I personally think you should convert all your gold to Smith and Wessons, Glocks, Sigs... you get the picture, and ammo. If the world goes to hell... gold won't do much for anyone, but a 9mm will. Post apocalypse no one will want gold, they will want food, water, heat, shelter and safety. Gold will provide none of these things." – Paid-up subscriber Karen Mize
Regards,
Sean Goldsmith
Baltimore, Maryland
August 31, 2009