Ladies, Gentlemen, Bulls and Bears,
It's been a while since we last met and, unfortunately, we haven't spent that week lying on a beach with a capri-sun, uh uh. It's been hectic, lots of news, lots of volatility and especially lots of nonsense. The S&P has held its rally surprisingly well rebounding from every bear jab with aplomb, the index is holding on to the 840 level, up 26% from February's satanic low of 666. Here's a nice graphic summary of long term bears and where we currently stand… If you're going long you have to ask yourself: "What's the upside?"...
The aforementioned "nonsense" is aimed directly at the bulls. You buy this market you are a mighty brave cowboy. Let's have a quick look at last week's main news and rumours. Firstly the jobs report; the big number came out on Friday and was its usually disturbing self: another 663k jobs vaporised in a month along with the predictable negative "revisions" to January's and February's numbers. 663,000 is the entire populations of Luxembourg and Iceland getting the boot - in a month! Luxembourg and Iceland have combined GDP's of about $70bln by the way, so you can use that as a ballpark of what to scratch off US production in March too. And how about this stat: Employment in the manufacturing sector declined by 206,000, its thirty-seventh consecutive monthly decline. So manufacturing jobs have fallen every single month since April 2006! No two ways about it: that is depression bad. Great chart below of previous downturns and their relative unemployment data, this is worth printing out and mulling over:
Nevertheless the markets took the ugly news on the chin and steamed onwards. Prompted by? Probably two major catalysts:
The G20 meeting in London… Result: more regulation and more government deficits: they're going to borrow us back to prosperity GEE PROBLEM SOLVED!
More importantly, the relaxing of "Mark To Market" accounting rules for the banks. Hmm, can you smell that, smells like……...........
This is an accounting rule that improved transparency by forcing banks to value daily certain investments, held for trading purposes, by the price they would get for them if they were to sell them on that day. The banks insist that the market is not functioning and these assets are worth more than mark-to-market indicates. Exactly like the people who leave their house on the market for three years asking too high a price and insisting: "but my house is worth more than that". Nevermind the fact that the banks were happy to benefit from Mark-To-Market when it was the prices of their liabilities that were being marked lower – no problem with that, no siree! The stock market rally also ignores the simple fact that the investments subject to the rule are a minority of the bank's portfolios; Bloomberg indicate that about 30% of the largest banks' assets require M-T-M pricing. Bottom line is that this is a further step toward fogging the clarity of a bank's balance sheet and if investors don't know what they're buying they simply won't buy it. The accounting rule was originally put in place following the Enron scandal to prevent such balance sheet abuses, and it is now being repealed because so many of the banks currently resemble the giant fudge-cake that was Enron's balance sheet and the only way to keep those banks breathing is if everyone tacitly agrees to what is actually a collective fraud, thereby granting it a veneer of honesty. Don't be fooled folks, this is all about as honest as a Chinese distance runner.
Earlier last week there was more bad news, predictable perhaps, but still bad: credit card losses have come in at, shock horror: record highs! Who could have guessed it? Credit card write-downs soared to record levels in February, representing an all-time high in the 20-year history of the Moody's Credit Card Index ....
Credit card charge-offs, the write-down of uncollectable debt, advanced decisively to 8.82 percent in February, marking the sixth consecutive month of increases. The level, is more than 300 basis points higher than a year ago.[Moody's] predicts the charge-off rate index will peak at about 10.5 percent in the first half of 2010, assuming a coincident unemployment rate peak at 10 percent.We're confident that Moody's will be proved wrong on both their unemployment call and credit-card charge-off call and that ultimately the credit-card collapse will be another demolition ball to the bank's balance sheets. Along with our old chestnut…
(assume Darth Vader voice)
... Commercial Real Estate:
Tuesday brought interesting news to CRE watchers in the form of a famous Boston landmark; the Hancock Tower. Birdsong have a sweet-spot for Beantown having spent a youthful year in the historic shadow of Fenway Park; our memories of the city and the mirrored Hancock are all cherished... unfortunately there are a few investors who aren't going have quite such fond recollections of the iconic tower… Bought for $1.6bln in 2006 (at about a 5% cap rate by the way) the buyers defaulted two months ago and the property went to auction last Tuesday fetching a not-so-hot: $660mln. A half-off sale folks, better than Tesco!
We've previously discussed shorting US Commercial Real Estate by buying puts in a fund of Commercial REITs which trades under the ticker symbol IYR. Friday saw a massive rally in IYR thanks entirely to some interesting shenanigans with one REIT: Kimco Realty, which was up 25% on the day. Kimco is a shopping centre REIT and has been, like most REITs drowning under unmanageable, boom-time, debt commitments. Kimco announced on Friday that they had rustled up over $700 million by issuing 105mln new shares at $7.10 a share, diluting stockholders by a hefty 39%. Crucially, the lead underwriter on this deal was, altar boy of Investment Banks, Merrill Lynch. How surprising then that, just minutes after Kimco's offering was announced, Merrill analyst Craig Schmidt raised his Kimco rating from "Sell" up to "Buy"… resulting in a Korean rocket under Kimco's share price all the way up to $9.40 – that's a 30% premium to the offering price which closed the same day! This should already have your "something smells" radar beeping but here's the cherry: Kimco are going to use the $700mln proceeds from the offering for debt repayment on a $707 million outstanding credit facility… You'll never guess who that credit facility is with… it couldn't be, that would be, well it would be outrageous… it is: Bank Of America aka Merrill God Damn Lynch! Honestly, these guys are right up there with the aforementioned Chinese distance runners; if they weren't such crooks you'd almost have to applaud them. Birdsong aren't clapping. There is opportunity here though; this whole thing is a charade and it will, in time, be exposed as such. General Growth Properties (another shopping cenre REIT) similarly issued an equity offering a few months ago to help with their debt obligations, the offer was in the $20 range and their shares closed yesterday at 72cent!
Birdsong are taking advantage of Friday's IYR rally to build up a leveraged options position short the Real Estate fund… the road may be slippery but we have patience… and the right tyres.
We finish up today with a cyber-birthday-present from Birdsong. A real puppy would get us into serious trouble with the powers that be; so, O, it will have to be a cyber-puppy, enjoy:
