CNBC – New Homepage

July 23, 2009 · Posted in Business · Comment

CNBC has appropriately changed its homepage (from zerohedge.com):

Click on image to enlarge.

Tags: cnbc

GE – What Are People Expecting?

July 19, 2009 · Posted in Business · Comment

GE’s dismal results seemed to take people by surprise last week, as Reuters writes GE results slam market:

NEW YORK (Reuters) – Wall Street stocks skidded on Friday after disappointing earnings at General Electric Co jolted investors who had hoped a U.S. slowdown would be mild and sent them scurrying to the safety of government debt.

The slide pulled European shares down as well, though Asian markets closed higher before the U.S. news hit.

The dollar fell broadly as GE’s results and lowered outlook for 2008 — along with a worse-than-expected slide in consumer confidence — undermined a view that the worst of a credit crisis that has battered markets for months might be over.

Oil steadied after an earlier decline as supply concerns and the weak dollar countered expectations that slowing economic growth will reduce global demand this year.

GE shares slumped more than 13 percent, their worst decline since the stock market crash of October 1987. The conglomerate, viewed as an economic bellwether because of the range of its businesses, reported an unexpected 6 percent decline in first-quarter earnings and lowered its forecast for 2008.

…let’s remind everyone about GE’s predicament, in March I referenced:

For more than a decade General Electric Co. could easily avoid disclosing the value of its real estate and business loans. Not any more.

Since Jan. 2, GE has lost 45 percent on the New York Stock Exchange, mostly because shareholders are no longer willing to accept whatever the Fairfield, Connecticut-based company tells them about its finance subsidiary unless it’s based on so-called mark-to-market accounting rules.

The world’s biggest maker of jet engines and power turbines told shareholders last week that 2 percent of GE Capital Corp.’s assets are being valued based on market prices. The remaining $624 billion is being carried at levels that GE, the last original member of the Dow Jones Industrial Average, established in many cases years ago, according to CreditSights Inc.

“The notion of having 98 percent opaque and 2 percent valued with clarity is something that by its very nature would make investors nervous,” said Robert Arnott, founder of Research Affiliates LLC, which oversees $30 billion in Newport Beach, California and owned 481,201 GE shares as of Dec. 31. “Having some clarity on what the other 98 percent is worth is valuable.”

The simple conclusion that one has to draw when applying simple math is precisely what I wrote back then:

98% valued at fantasy prices, 2% at real world prices means that there is nothing but trouble down the road for GE.

Tags: ge, mark to market

CMBS Talf Launches – Nobody Cares

July 16, 2009 · Posted in Business · Comment

A few days ago the Fed said most eligible CMBS OK for TALF:

Most commercial mortgage-backed securities eligible under published guidelines for the Term Asset-Backed Securities Loan Facility will also meet other Federal Reserve criteria, the Fed told investors on Friday, according one investor and a dealer.

Uncertainty over which CMBS could still be rejected from the TALF program next week has created confusion and capped gains in the $700 billion market, which the Fed wants to help unlock with the lending program.

The assurance by the Fed “will help, but we expect the market will be cautious,” Citigroup analysts said in a research note obtained by Reuters.

CMBS derivative index prices rose after the Fed conference call, according to one investor.

Today the program launched, and Investors request $669 mln in TALF loans for legacy CMBS:

Investors requested $668.9 million in loans for legacy commercial mortgage-backed securities on Thursday in a slow start for a key government program aimed at reviving the commercial real estate market.

The Fed is offering loans to investors for commercial mortgage-backed securities under its Term Asset-Backed Securities Loan Facility, or TALF, in an attempt to revive markets both for new and existing commercial bonds.

Lowering lending costs in commercial real estate could help ease refinancings by borrowers, who are increasingly defaulting on loans for a lack of credit.

Thursday was the first time the Fed accepted existing bonds under the TALF and the second round for its newly issued CMBS TALF program.

Investors did not request loans for newly issued CMBS in June or July.

It seems like CMBS TALF is off to a slow start. $668 million out of $700 billion is a drop in the bucket. Don’t expect it to pick up significantly. Commercial property lenders are loaded with non performing loans, precisely because lessees are going out of business or are unable to make their full payments. Demand for new loans is dried up. As I explained before, what the initiators of this program are missing…

(…)is the fact that the consumption credit expansion has brought about an abundance of retail space in malls, shopping centers and elsewhere. On top of that, a lot of businesses from the lending business were utilizing a significant portion of prime office space.

Now those businesses that were utilizing these spaces are going out of business. The recession is trying to send a signal that the resources are needed elsewhere. They are unable to make their rent payments. The owners of the properties start defaulting on the loans made during the credit expansion. The lenders notice that way too much space was built. There is no demand for any more retail space. In fact, there is a significant surplus. Nobody wants any more retail space. People are sick and tired of debt and over consumption.

Now, what are those very lenders going to do when they receive additional loans from the Fed, at around 2.9% to 3.7%, maybe even more for higher maturities. So they would have to earn at least an additional 100 basis points, probably more, in rental yield in order to make this investment worth their while, and that over the next 3-5 years.

Is this going to happen in an environment of falling prices for commercial properties, falling rents, and record vacancies? No, absolutely not. When people have had enough of something, they’ve had enough. If this is still not clear, I would recommend reading Robert Prechter’s example on Jaguar Inflation which I posted in Inflation and Deflation Revisited.

CMBS TALF will be a miserable failure, just as all other lending facilities launched by the Fed. It is possible that this failure will actually expose the dire situation of commercial lenders and accalerate the downward spiral. Thus, look out for the aftermath of first CMBS TALF auction on July 16th. Rather than it being a cure, it is likely that it will usher in a significant acceleration of commercial property loan defaults.

Tags: cmbs, commercial mortgage backed securities, talf

IT Spending – Gartner, Forrester Revise Forecasts Down

July 14, 2009 · Posted in Business · Comment

CIOInsight.com reports Gartner, Forrester Revise IT Spending Forecasts:

Two of the biggest analyst firms recently adjusted their IT spending predictions, and though the numbers vary slightly, consensus is that things don’t look great for 2009.

Predictions for 2009:

Gartner: Worldwide IT spending will total $3.2 trillion, down 6% from last year. (The March release estimated only a 3.8% decline)
Forrester: global IT spending will drop 10.6% this year. (Down from a previously estimated 3%)
Forrester: US IT spending will drop by about 5.1% (previous estimate: 3%)
Gartner: Mild recovery next year, 2.3% gain in spending
Gartner: Computer hardware will suffer the most, falling by 16.3% to $317.8 billion
Forrester: Computer hardware purchases to drop by 13.5%
Gartner: IT services market will drop by 8.2%
Forrester: IT services market will drop by 8.5%
Gartner Conclusion: “While the global economic downturn shows signs of easing, this year IT budgets are still being cut and consumers will need a lot more persuading before they can fell confident enough to loosen their purse strings”
Forrester Conclusion: “While Q1 2009 saw a scary drop in purchases in the US tech market, ironically that is good news for the long run and we expect to see a stronger rebound sooner. The big drops are not precursors to further declines; rather, we think they are evidence of a temporary pause in US tech purchases, which we expect to start recovering in Q4 as businesses realize that they overreacted in the first quarter”

My comment: For 2009 the truth may lie somewhere in between the two institutes’ forecasts. But regading the coming years: Unless we get some temporary and short-lived recovery, expect Forrester and Gartner to revise their estimates down again.

Tags: forrester, gartner, it spending

General Motors Finally Declares Bankruptcy

May 31, 2009 · Posted in Business · Comment

The time has finally come, GM looks to follow Chrysler with quick bankruptcy trip:

The automaker aims to make a swift trip through bankruptcy by cobbling together its stronger assets to create a new more viable company. If all goes as planned, GM would emerge from bankruptcy within three months.

Previously, the idea that one of the biggest and most complex bankruptcies in corporate history could be completed in such a short time was considered impossible as stakeholders bickered about who gets what.

There was never another option for GM than an eventual bankruptcy. I wrote about this before.

December 18th 2009:

Did you ever take a look at GM’s financials? The company is worth minus $60 billion. In a time like this you are asking taxpayers to sacrifice their hard earned dollars and throw them at a business that is worth LESS THAN NOTHING.

(…)

Let’s not again prolong the agony of a necessary correction by trying to keep prices up and failing businesses going, like we did in 1929 and 1930. Let’s help the big 3 become efficient by allowing the consumers to decide what is to happen. Let their owners go through Chapter 11 if necessary. Let the good pieces be turned into efficient and successful businesses and the useless parts be released for more useful occupations so the American car industry can once again be a force in the world rather than a caboose.

November 21st 2008:

As far as GM and Ford, they don’t deserve any more mention. These two giant jokes cannot possibly be called business operations. It is insulting to see the media seriously pose the question as to whether or not the taxpayer should even consider sparing his change for these miserable failures. It hurts to see their executive junkies squander more money on private jets to capitol hill in order to petition for yet another bailout fix. They, along with the UAW, need to be wiped off the face of the earth once and for all and stop making the American car industry the ridicule of the world.

Nancy Pelosi said in December 08:

U.S. House Speaker Nancy Pelosi said she believes either Congress or the Bush administration will step in to aid domestic automakers because bankruptcy is “not an option.”

“I believe that an intervention will happen,” Pelosi said at a briefing in Washington. “Everybody is disadvantaged by bankruptcy, including our economy, so that’s not an option.”

Unsurprisingly, she was wrong. In fact, bankruptcy was the only option. All arguments we heard over these past months in favor or more and more bailouts were wrong. It is important to point this out because even now the people who were wrong on every single thing they said, continue to spread their nonsense publicily.

Tags: bankruptcy, General Motors

Commercial Real Estate Poised to Implode

May 25, 2009 · Posted in Business · Comment

Nothing but grim news on the commercial real estate front. The New York Post writes NO NEW LEASE ON TRILLIONS IN DEBT:

A trillion-dollar storm is gathering over the commercial real estate landscape that’s threatening to add further pain to an already bruised US economy.

At the center of the worries is some $3.5 trillion in debt backed by everything from strip malls to offices and apartments across the nation — the lion’s share of which is badly underwater because this recession followed a five-year commercial property boom fueled by easy money and loose underwriting standards.

Now the owners of the less-than-full malls, apartment complexes and office buildings are succumbing to the worst economic collapse since the Great Depression — because they can’t refinance the debt.

The commercial debt securitization market is dead.

“Because there is no securitization the system cannot process the wave of maturities coming due,” said Scott Latham, commercial property broker at Cushman & Wakefield.

“This is arguably the most important fact we’re going to be dealing with. If there’s no mortgage market that can feed the machine you’re just not going to have deals,” he said. “It’s going to be years before we recover and even when that happens we’re going to discover that we’re in a new paradigm,” Latham added.

About $1.4 trillion in real estate debt is set to mature over the next four years, with some $204 billion coming due this year alone.

Most of that debt won’t be able to be refinanced or restructured because lending standards have tightened and commercial real estate values have cratered since last year, according to Deutsche Bank analyst Richard Parkus.

The debt behind the commercial real estate boom, commercial mortgage-backed securities, or CMBS, entails pooling together commercial mortgages in apartment buildings, shopping malls or trophy offices in different locations, packaging them into bonds and selling them to investors.

CMBS issuance reached its peak with $230 billion transactions completed in 2007. Last year, as the market was dying, a relatively anemic $12 billion in activity was seen, according to industry newsletter Commercial Mortgage Alert.

Most of this does not seem to have a major impact on large national banks, but the total number of small banks affected will be huge, according to the Wall Street Journal Small Banks Face Hits on Commercial Real Estate:

Thursday’s “stress-test” results will bring fresh scrutiny to the nation’s biggest banks. They also are likely to highlight the woes from commercial real-estate loans that are piling up at large and small banks alike.

In the worst-case scenario, federal regulators examining the 19 largest U.S. banks are projecting losses of up to 12% on commercial real-estate loans over two years, according to a document viewed by The Wall Street Journal. The regulators are likely to cite commercial-property debt problems as a major reason why at least some of the large banks need additional capital.

My comment: Does anyone seriously believe that in a worst case scenario the banks will lose no more than 12% on commercial real estate loans? But even then:

With that loss rate, “you’re talking about a depression in the U.S. economy and a major crisis in the banking system,” says Richard Bove, an analyst at brokerage firm Rochdale Securities LLC.

… say hello to commercial property crunchtime.

Tags: commercial real estate

Time for Treasurys

May 16, 2009 · Posted in Business, General Economics · Comment

In November 2008 we started seeing Treasury Yields at Record Lows:

The way toward the 2-2.5% yield is wide open. I expect to see yields at those levels sometime in 2009/2010. The yield curve will flatten out further since there is little room left for Treasury Bill Yields to drop.

Then in mid January, with Treasury Yields in free fall, we saw yields below 2.5%. I wrote then:

It is certainly likely that yields will snap back into the corridor and have a significant short term movement upwards toward the upper end of the range over the next weeks.

This chart summarizes my recent short term predictions:

So what’s next? Well, now we are about to hit that upper end. From a technical point of view, treasury yields could hit it at around 3.3% and then resume its move toward 2%. Fundamentally, there has been a lot of talk recently about an economic recovery. This has helped boost the stock markets up for a while and sparked a sell off in safe Treasury investments.

When it becomes obvious that these hopes have been premature, the flight to safety will surely resume. An ongoing decline on the stock market will then be accompanied by falling Treasury yields from now on toward the end of the year.

A business cycle caused by credit expansion policy needs to go through the recovery phase and this recovery has to come full circle. So far this has not yet happened. There are more inflated sectors ready to implode, in particular consumer credit and commercial real estate. This will continue to affect banks all over the country. Americans, sick and tired of debt, will continue to abstain from consumption and consolidate their finances.

For anyone looking for a safe place to park their cash right now, Treasury Notes are looking pretty attractive at this point.

Tags: treasuries, treasury yields

Gold & Silver Hold the Line

May 12, 2009 · Posted in Business · Comment

Gold has made it back into the safe 900s and Silver is attempting another run toward $15.

The HUI index which monitors gold mining companies has now hit a 7 month high:

Click on image to enlarge.

To look at an example of how well silver mining stocks have done since silver bottomed out, please see below the chart of Silver Wheaton Corp (SLW), a Canadian silver miner:

Click on image to enlarge

The stock has tripled over the past 5 months.

The relatively low trading volume coupled with good performance is a likely indicator for smart money buying in.

I still like silver here and I still like gold here…

Tags: gold, silver, silver wheaton

Markets Slide Alongside Lousy T-Bond Auction

May 7, 2009 · Posted in Business · Comment

Markets took a slight hit today. The significant event of the week, maybe even of this quarter was a lousy auction for bonds maturing on 05/15/2039.

They traded as low as 4.13% before the auction and went as high as 4.30% to close at 4.26%, or 13 basis points higher.

Some random observations/expectations:
- Tech stocks, which lead the recent rally, lead the decline today.
- Short interest on some stocks is remarkably low
- In particular I am monitoring commercial property businesses, such as Simon Properties Group, and Vornado, both of them have a short interest of close to 0% in spite of the impending commercial property crunchtime.
- Jobs data on Friday will probably report something between 400,000 to 600,000 nonfarm jobs lost again, based on today’s ADP jobs report.

Nonfarm private employment decreased 491,000 from March to April 2009 on a seasonally
adjusted basis, according to the ADP National Employment Report®. The estimated change of
employment from February to March was revised by 34,000, from a decline of 742,000 to a
decline of 708,000

Whether these are signs that the recent bear market rally is coming to an end…only time will tell.

Tags: commercial real estate, stock market

Goldman’s Orphan Month

April 14, 2009 · Posted in Business · Comment

Yesterday I wrote about the recent optimistic bank results:

There seems to be a common theme to this: Inflate the stock price with phony good news and then quickly issue additional equity…

Is there anyone else whom this could apply to? Let’s see what we can find Inside Goldman Sachs’ Results:

Yesterday, after market close, Goldman Sachs Group, Inc. (NYSE: GS – News) reported 1Q09 earnings of $1.66 billion or $3.39 a share, up from $1.51 billion, or $3.23 a share a year earlier. The results were way ahead of consensus estimates of a profit of $1.64 per share. A conference call to discuss the results was held this morning.
(…)
The bank also announced a $5 billion offering of common shares to the public. The proceeds will be used to repay the $10 billion of capital it received from Treasury under the Troubled Assets Relief Program.

Obviously Goldman isn’t even trying to be subtle about this approach. The motto seems to be to take advantage while the high stock prices last.

Is there reason to believe that Goldman is not being truthful about their resules? Why yes, there is. Enter the mysterious Case of the Missing Month:

Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s earnings statement, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ended in February.

The orphan month featured — surprise — lots of write-offs. The pretax loss was $1.3 billion, and the after-tax loss was $780 million.

Nice one, Goldman. Let’s see how many idiots will fall for it. Will it help them in the long run? Abe Lincoln may have some good advice: “You can fool some of the people all of the time, and all of the people some of the time, but you can’t fool all of the people all of the time.”

Tags: goldman sachs

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