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Bull markets, they say, climb a wall of worry. Bear market rallies . . . I don’t know what they say about them, but if this is the former, there most certainly seems as if there is enough to worry about and if it is the latter, my vote would be to something along the lines of “bear markets are like walking on eggshells.”
Unemployment and its effect on the much mentioned U.S. consumer, headlines tomorrow’s market activity. Will “cash for clunkers” be the Cinderella story of this recovery and revive Joe Sixpack’s desire to lever and spend or will the stimulus, which is still having a more potential than kinetic effect burn off like starter fluid on a brick?
One area of the economy that seems poised to feel the effects of what ever the current rally turns out to be is commercial real estate. The major banks, we’ll call them the TALF 10, had a majority of the exposure to residential mortgages due to all of the securitization that was going on. Commercial mortgages on the other hand are usually originated and held on the books of the same institution and as such are naturally diversified across many, albeit smaller, banks.
The Moody’s Investor Service Commercial Property Index fell 7.6% in May (the latest month for which data is available) putting it 28.5% below year ago levels and 34.8%% below the October 2007 peak. The real world effect of this is that as of July 31st 69 banks had failed in 2009 alone and even Sheila Bair would be hard pressed to recite every name on that list from memory. Ever heard of the First State Bank of Altus? Me neither but before it went bust it had assets of $103.4 million. That should frame things for you.
Developers Diversified Realty Corp. (DDR) is said to be issuing two bonds totaling ~$600MM which are expected to become the first TALF eligible securities. The commercial mortgage portion of the TALF program does not seem to be meeting the same success as the residentially focused initiative as various regulatory wrinkles and rating agency downgrades continue to hinder the effort.
If following the “smart money” is any indication it is interesting that Mort Zuckerman is selling shares in Boston Properties Inc. (BXP) to buy new printing presses for his other venture, The Daily News. I guess nobody told Mort about Web 2.0.
A recent analysis by the WSJ showed that “U.S. banks have been charging off soured commercial mortgages at the fastest pace in nearly 20 years,” and “could reach about $30BN by the end of 2009.”
From all of this, one would expect the CDS spreads on REITs to be widening and their equity prices falling but that’s where the worried walk on the eggshells starts. There are 21 REITs in the CEC universe and at present the CEC Portfolio is long 14 of them. Keep in mind that CDS level movement is the main driver of the buy/sell decision in the CEC Strategy but also that the negative correlation that is empirically evident must also exist in real life for positions to be initiated. In other words CDS levels and equity prices must be moving in opposite directions before a stock is bought or sold.
Since the CEC Portfolio is long that means that the CDS was falling and equity prices rising when the positions were initiated. Risk management takes care of existing positions but the important point here is that the CDS market does not seem to agree with the media regarding the major REITs at the moment.
This should not be too hard to comprehend because the media, for the most part, does not agree the S&P 500 should be at 1,000 right now either.
A wall of worry or walking on eggshells . . . . tune in tomorrow!
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Those with a long memories might also remember Paul Doughty who as the president of First State Bank of Altus was also behind the bad loans when he was
executive VP of Oklahoma National Bank when it failed in 1982.
Doughty was named in many of the 18 criminal allegations file against the bank and accused of helping Vulcan Oil & Gas whose president was Rod Fancher.
Vulcan was sued by investor and accused by the OK state securities department for violating securities laws. Doughty and Fancher would a few years later
while Doughty was back at First State Bank of Altus would be convicted by a jury for another business scam. The state securities department drop the
charges those involved signed an agreement they would refrain from violating securities laws in the future.
Why Doughty back as president of another bank? If that is bad, read the following?
It was Altus Ventures’ investment arm of the bank holding company that Paul Doughty used to file two false tax claims stating they had invested $221
million in QMA during 2005 and another $200 million in 2006. Yet they only invested $32 million in 2004 and 2005. For those claims they received $126
million in tax credits which they immediately sold for 50 cents on the dollar. Pocketing $63 million in taxpayer money. When the media first exposed the
2005 state officials claimed there was nothing illegal in filing a false claim misrepresenting the amount invested, because some unidentified private tax
attorneys claimed to have found a loophole. Private tax attorneys do not decide matters of law. At that particular time the IRS was rounding up tax
attorneys for issuing bogus opinions. The IRS does not recognize private tax attorney opinions’ anymore than they would the opinion of any idiot. My
apologies if that might seem redundant to some.
State lawmakers introduced a bill that was supposed to close that loophole. When the bill got to the house Paul Doughty dropped a huge donation on Kelvin
Calvey, who was chairman of the tax revenue committee and a candidate for US Congress. Calvey allowed Doughty to help write the legislation so it would not
according to Doughty “hurt the good programs.” The governor and state lawmakers proudly announced how they had closed the loophole. Then Altus Venture’s
filed the second false claim it had invested another $200 million in 2006 when it did not invest one dime. The whole loophole thing was their ruse for
their golden goose abuse.
Guess what some of the language that was added while Calvey and Doughty were protecting Doughty’s good programs? Ready for this? Take a deep breath!
In the event anyone is ever found guilty of violating the law in taking tax credits the state would be prohibited from recovering all money taken illegal.
One more time because this one is beyond criminal imagination! In the event anyone is ever found guilty of violating the law in taking tax credits the
state would be prohibited from recovering all money taken illegal.
The law already had the maximum that anyone found guilty of violating the law could receive was a loss of eligibility to participate in the program in the
future.
If you read the law that created this program you will see where the public was stripped of all protection and the criminals given total protection. A
program that operates freestanding allowing people like Doughty to take as much in tax credits as they desire. Sell those tax credits for cash. Because tax
credits divert revenue before it is counted as revenue it leaves no paper trail.
While Doughty’s company pocketed $63 million in clear profit by those buying the tax credits avoided paying another $63 million. That is about as sweet as
it gets if you are one of the privileged. What the heck it is your money and if you aren’t going to say anything no one is going to stop. There are about
40 other Altus Venture type groups taking tax credits.
In summary this bank failure had nothing to do with the economy, and everything to do with a host of state officials allowing private individuals to
control our state’s treasury. Yes that includes the Oklahoma Tax Commission for allowing the false claims, state lawmakers and the governor for covering
for the fraud and embezzlement.
Any who does a little research, apparently something this paper an affinity to, will quickly find that only one audit on the bank has been completed. FDIC
audits are limited to the bank only. The Federal Reserve System, which has jurisdiction over the investment arms (LLCs like Altus Ventures’) started a
second audit which has yet to be announced. There will be criminal charges forthcoming!
That is just for starters. Take a look at ProwlingOwl.com if you want to know where your tax dollars are going and how nothing is done to prevent or stop
corruption, there is no punishment and the thieves get to keep the money. Oh, yes, and there is always a good excuse. A good excuse by our officials for
why people can steal and keep the money and not even be investigated or any effort made to recover stolen money. ProwlingOwl.com
In an appearance on the CNBC show “Stop Trading,” Cramer noted that the major commercial REITs are doing quite fine, thank you, despite the negative outlook for the sector.
“I have Fed(eral) Realty, the best mall play. It’s up huge,” Cramer says.
“How about Boston Properties, your friend Mort Zuckerman? The stock’s up huge. How about Brandywine (Realty)? Off a giant secondary, it’s up gigantically.”
So, “What the heck are we talking about?” Cramer asks.
“This market is on fire. I’m tired of hearing about the bears saying the next big down leg is commercial (real estate). This is the heart of commercial.”
He advises investors to just “focus on the facts.”
Cramer also disagrees with what the media is saying about IPOs. “The papers have said over and over again that’s not going to happen,” he says.
“I have a number of friends in private equity. … There are so many new deals in the pipeline that are about to be announced. The whole ‘no more deals thing’ just doesn’t jibe with the facts.”
No.