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johnthebear
256 Comments
Will the Recent Pullback in REITs Create a Buying Opportunity?
NO, IT DOES NOT PRESENT A BUYING OPPORTUNITY!
IYR will continue moving down. REITs with cash can buy at good prices for commercial real estate once the fluffy lofty values evaporate as capitalization rates rise along with inflation and higher interest rates.
Have you not heard that 12 trillion dollars have been lost from the world wide equity markets? Don't you believe that the worst is yet to come in bank losses? If you can get your mind around all that, you have to realize that banks will not have money to lend for large commercial development projects for a long time. Buyers will not be able to get financing and then at higher interest rates and based on more credible appraisals than has been the rule of the last couple of years. This means prices of the best real estate fall and REITs will have to mark to market the inflated value of much of their portfolio going into 2009. As vacancy rises and foreclosures increase, rents will fall. NYC has lost over 75,000 of it's highest paid workers and now even houses in the Hamptons are even being discounted! Have you heard that Wall Street firms will likely be seeking tax refunds from the city for over estimated taxes for 2008? NYC and the state of NY appear to be headed for a financial crisis, again.
None of the foregoing facts are taken into consideration in an argument that is based on the premise that prices will continue to go for the next 30 years the same as in the past 30 years...
Yes, there will be a time to buy IYR, but not for another year or two from NOW! Until then, SRS is a better way to play the REIT market, IMO.
Tuesday Outlook: Commodities, Emerging Markets
Have you heard how they do FXI/FXP to make it 2:1 on a consistant basis?
Regarding FXI, it looks to me like the folks on this side of the pond are finally looking at what is happening to .ssec and .hsi and deciding China is not such a good place to be and so they are selling FXI. Some have said if you believe the market is heading down big after the Olympics, why not sell now?
FXP really looks good here.
Thinking About Economic Forecasts
To understand the bigger picture think of the context:
We give out a bonus to stimulate buying, which seems to work in the short run, at the same time, lower interest rates causes the dollar to fall... ok, so what is the effect... short term prop-up of the retail economy and a falling dollar that makes exports rise. So far so good. What next?
Think about it... when we export more, and then Europe exports less, then their economy declines along with China, Japan and India who also export less! Not to hard to figure so far...right?
China, Japan and India stock markets are 50% or more off their 52 week highs, reflecting the weak economy there as well as Europe... with me so far?
So what is next? So called forecast ignore the basics and attempt to estimate numbers that do not reflect the trends in place that anyone can see. It does not take a degree to tell you that when we rely on exports that will decline rather than production that we are able to sell to our own consumers to sustain income for the typical family, we are in a heap of trouble!
Our real incomes are falling, inflation is rising along with unemployment, which means that the housing bubble has a long way down before bottom. Add to that the number of businesses that close, vacancy increases, property taxes collected for state and local government declining drastically (hear about NY City and Wall Street Loses effect on tax revenue)? And before long you get the picture that things are worse than the economist forecast of a fraction of a percentage point!
Commercial real estate has not been talked about much, but the fraudulent appraisals and phony values that back up so much of the mortgages held by both large and small banks will soon cry out in shock and pain. Beware of where you put your money! The REIT industry has not been faced with this question yet, but it soon will be as vacancy rises, rents fall, foreclosures increase and banks have no way to loan enough for buyers to step in to buy the sharply discounted properties... except those that have CASH and lots of it. That is how the super rich made it coming out of the depression of the 1930's. Keep your powder dry, this market will not see a bottom for about 2-3 years or more (compare with the 2000-03 recession) year, IMO.
Tightened Lending Standards: Reading Between the Lines
What happened to the traditional loan with a 75% to 85% L/V ratio with decent a credit report?
If you don't have a down payment, you should not be buying a house.... period.
Junk-Bond Defaults Continue Apace - Moody's
China: New Regulations on Money Flows
Tonight I saw a video by CNBC concerning life in China today. I was amazed at the high quality of the stores and shopping, the appearance of the people and their proper use of English to describe their life. Things looked so prosperous, it made me wonder about some basic assumptions I have regarding the immediate future for China.
I am betting against China using FXP/FXI. While their stock market is down a lot, I have been looking for another 50% drop from here.
I have read of excess capacity in industrial companies and your articles confirm that the problems are severe, especially rising unemployment, inflation and bankruptcy along with banks nearing collapse, but hidden by the government.
It seems to me that after the Olympics, the people will ask very serious questions of how their lives should be lived. I foresee a rebellion as a result of the factors noted. The people will ask "how can this happen to us?" They will be thinking "We have been promised a life wealth, yet here we are in recession, unemployed, can't afford to eat or buy what we need, what went wrong?" The problem for us is that our people will be wondering the same thing as our political system has failed with liberal give away programs that pander to voters and keep the crats in power. Looks bad all over. Hope I am wrong, but to hedge against China is one way of protecting myself.
Inflation was the problem for China in 1989 and they have come a long way since then. That makes the government restrictions on everyday life so much more repulsive. Some question Bush's visit to China, but I think it will encourage the people to seek a better life of political and religious freedom without anyone having to say very much. It will be an interesting story to follow in the coming year as the Olympics fade from their memory.
Housing Crisis Likely to Wipe Out Two Decades of Family-Earned Wealth
Too many rats to escape at the same time without losing our tails! No longer a story of 3 blind mice.
China's Largest Online Learning Company Should School U.S. Investors
"The Chinese government recently informed foreign companies that upper-level management can’t get away with using translators to do business inside its borders anymore. Those who work there have to speak the language if they want to wheel and deal in the country."
Do you think that basic thought will ever sink into our pandering politicians?
How dumb we are in so many ways. So sad that we have ruined the best economic system in the world with stupid liberal politics.
Underground Lending in China Exceeds RMB 10 Trillion
Wait till the talking heads hear that things are not so great in China and BRIC?
They sure will be so surprised since China is the only safe investment or parking place for their clients wealth while US markets are tanking in a bear market. Do you think they understand China is also in a bear market?
Thanks Michael for your articles, always helpful.
ETFs: Implications of Goldman Sachs Predictions
Pump and Dump was the name of the game in the 2000 crash. Goldman and Abby Cohn were a lot to blame for that and they are doing the same again with the BRIC group. That is all they could say in 1999, 'stocks are going higher, because they have been going higher'.
The author should look at the 200 day moving average of all these countries and factor in a global recession before jumping on the bandwagon. A reality check is in order.
"Goldman Sachs’ economic team recently pulled out their crystal ball to come up with a new world order for the year 2040"
Just because all of the stocks he mentined have gone down a lot does not mean they can't go down much lower!
Goldman and the author will be right one day, but in my judgment, the long climb back up the mountain will start from way down deep in the valley, after lingering near the graves of failed companies for several years.
ETF Update: Chinese Real Estate, Water and Singapore
China Manufacturing Shrinks for First Time on Record.
By Li Yanping and Nipa Piboontanasawat
Aug. 1 (Bloomberg) -- Manufacturing in China contracted for the first time since a survey began in 2005 as export demand faltered and factories closed to clear the air before the Olympic Games.
The Purchasing Managers' Index fell to a seasonally adjusted 48.4 in July from 52 in June, the China Federation of Logistics and Purchasing said today in an e-mailed statement.
The expansion of the world's fourth-biggest economy slowed for the fourth straight quarter in the three months through June on weaker U.S. demand. China raised tax rebates for shipments of textiles and garments today and the commerce ministry is pressing for slower yuan gains to protect exporters after the currency's 6.8 percent advance against the dollar this year.
``Companies are less willing to invest as export growth slumps, credit gets tighter and the economic outlook worsens,'' said Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong. ``Factory closures ahead of the Olympic Games may also have played a role.''
The yuan fell 0.1 percent to 6.8409 against the dollar as of 11:13 a.m. in Shanghai.
The government has closed construction sites and shuttered factories in and around Beijing to clear smog before the games start next week. Shougang Corp., a Beijing-based steelmaker, will keep only one of four blast furnaces open during the games.
Not Enough Electricity
China also faces power shortages. The government has asked coal producers to increase deliveries to power stations to help ease a sixth year of electricity shortages and ensure supplies for the games, according to a July 30 report by the state-run Xinhua News Agency.
Six of 11 sub-indexes in the PMI fell to record lows, including output, new orders and export orders.
``The size of the slowdown is unexpected,'' said Xing Ziqiang, a Beijing-based economist at China International Capital Corp., the nation's biggest investment bank. ``The government may use a more active fiscal policy, slow gains by the yuan, and encourage lending to small companies.''
The Communist Party's Politburo said July 25 that maintaining growth and fighting inflation are the two biggest priorities for the rest of the year. Inflation this year is the fastest since 1996. Consumer prices rose 7.1 percent in June.
China is raising tax rebates on exports of textiles and garments to 13 percent from 11 percent today, according to the State Administration of Taxation. The Ministry of Commerce had urged China's cabinet to rein in currency gains and raise some rebates, a ministry official said July 14, speaking on condition of anonymity.
Yuan's Advance
The yuan's advance against the dollar in 2008 has been at more than double the pace of a year earlier.
The economy expanded 10.1 percent in the second quarter as the trade surplus narrowed 12 percent from a year earlier to $58.14 billion.
Today's survey ``may indicate the economy will continue to weaken,'' Zhang Liqun, a senior research fellow at the State Council's Development Research Center, said in the statement. Companies ``are facing increasing difficulties and this could curb economic growth and reduce employment and incomes.''
The PMI is based on a survey that started in January 2005 of more than 700 companies in 20 industries, including energy, metallurgy, textile, automobile and electronics. A reading above 50 reflects an expansion, below 50 a contraction.
The output index fell to 47.4 in July from 54.2 in June, while the index of new orders dropped to 46.2 from 52.6. The index of export orders declined to 46.7 from 50.2."
I think this article copied from Bloomberg is very telling for the next year. So while housing construction has been doing well in the last couple of years, have you factored in the huge drop in the Chinese stock markets and the loss of wealth by average citizens?
A recent forcast of a drop from 10% to 9% in the China growth rate may not be all that is involved in a slowdown of China. I have read of substantial overbuilding of manufacturing capacity in China and massive real estate speculation by developers with huge bank loans that may be foreclosed. The banks in China already have large loan defaults on their books that they have not acknowledged. But afterall, this is China.
The survey out today of purchasing managers supports more than a reduction of manufacturing due to smog conditions relative to the Olympics. This is a national issue.
You have not yet seen the effect in China of the sharp reduction of sales to Europe and USA, which are coming. Recession in both will cause lower exports from the US to Europe which has been supporting recent growth in the US. Sales outside the US have been the majority of the earning growth of US international companies.
It seems to me that the Europe recession which is only now beginning to take hold will greatly slow US export sales and will likewise impact China. As US and Europe slow, all exports from China slow, with growing factory closings and rising unemployment while at the same time inflation grows from 7% to 12% in China. Could get real interesting to watch the China government under these conditions!
So bottom line, China stock markets will continue to fall back to the 2004-05 level and that will probably include the stocks mentioned by the author, which don't look very promising IMO.
China FXI will continue falling. If you think the market will fall off the cliff after the government prop up of the Olympics, why not sell now?
As Jobs Decline
This is the most important observation in your article. Little has been said about the coming disaster for commercial real estate, but the REIT market has certainly taken notice. The Dow Jones Real Estate Index "IYR" and most of the REIT's that make up the index are in full retreat, well below their 200 day moving average, just like every stock market index except Canada. Global recession is coming.
Little has been said of the commercial real estate mortgages that are bundled in the SIV's with a wide range of quality and yields that are sliced and diced and sold to the stupid that have no idea of what they bought. Much of SIV's has no quality and very high yields, which attract stupid hedge funds with short sighted plans of interest rate trends. Many of the commercial loans were close to 100% L/V and are upside down and just have not been marked to market because there are few competent appraisers anymore to correctly reflect the true market values of these properties. It should not be long till you start hearing of fire sales that no on attends because there is no new mortgage money available for commercial loans that has not been already set aside to bail out residential mortgages.
Then there are all of the developers with partially completed properties or land developers that will not be able to keep up the interest payments.
First Priority is the first Florida bank to fail since Guaranty National Bank in Tallahassee in March 2004, the FDIC said. There have been 8 bank failures so far this year, The FDIC has a watch list of 90 banks and I read of one projection that there may be 300 or more failures this year. Write-downs are now at $484 Billion and are expected to exceed one trillion dollars! This last failure in Florida has 840 accounts with $13 million in uninsured deposits! That will tear the heart out of a lot of unsuspecting retired folks.
Don't Bet Against Chinese Demand Growth Just Yet
The survey out today of purchasing managers supports more than a reduction of manufacturing due to smog conditions relative to the Olympics. This is a national issue.
You have not yet seen the effect in China of the sharp reduction of sales to Europe and USA, which are coming. Recession in both will cause lower exports from the US to Europe which has been supporting recent growth in the US. Sales outside the US have been the majority of the earning growth of US international companies.
It seems to me that the Europe recession which is only now beginning to take hold will greatly slow US export sales and will likewise impact China. As US and Europe slow, all exports from China slow, with growing factory closings and rising unemployment while at the same time inflation grows from 7% to 12% in China. Could get real interesting to watch the China government under these conditions!
So bottom line, China stock markets continue to fall back to the 2004-05 level. What do you think about that?
People's Bank of China Relaxes Lending Caps
So, what do you think, will ^ssec and ^hsi and FXI all head down big time after the Olympics? I know they are already down a lot, but can we expect a lot more?
S&P Raises China's Rating, Derivative Losses Still a Concern
China Manufacturing Shrinks for First Time on Record.
By Li Yanping and Nipa Piboontanasawat
Aug. 1 (Bloomberg) -- Manufacturing in China contracted for the first time since a survey began in 2005 as export demand faltered and factories closed to clear the air before the Olympic Games.
The Purchasing Managers' Index fell to a seasonally adjusted 48.4 in July from 52 in June, the China Federation of Logistics and Purchasing said today in an e-mailed statement.
The expansion of the world's fourth-biggest economy slowed for the fourth straight quarter in the three months through June on weaker U.S. demand. China raised tax rebates for shipments of textiles and garments today and the commerce ministry is pressing for slower yuan gains to protect exporters after the currency's 6.8 percent advance against the dollar this year.
``Companies are less willing to invest as export growth slumps, credit gets tighter and the economic outlook worsens,'' said Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong. ``Factory closures ahead of the Olympic Games may also have played a role.''
The yuan fell 0.1 percent to 6.8409 against the dollar as of 11:13 a.m. in Shanghai.
The government has closed construction sites and shuttered factories in and around Beijing to clear smog before the games start next week. Shougang Corp., a Beijing-based steelmaker, will keep only one of four blast furnaces open during the games.
Not Enough Electricity
China also faces power shortages. The government has asked coal producers to increase deliveries to power stations to help ease a sixth year of electricity shortages and ensure supplies for the games, according to a July 30 report by the state-run Xinhua News Agency.
Six of 11 sub-indexes in the PMI fell to record lows, including output, new orders and export orders.
``The size of the slowdown is unexpected,'' said Xing Ziqiang, a Beijing-based economist at China International Capital Corp., the nation's biggest investment bank. ``The government may use a more active fiscal policy, slow gains by the yuan, and encourage lending to small companies.''
The Communist Party's Politburo said July 25 that maintaining growth and fighting inflation are the two biggest priorities for the rest of the year. Inflation this year is the fastest since 1996. Consumer prices rose 7.1 percent in June.
China is raising tax rebates on exports of textiles and garments to 13 percent from 11 percent today, according to the State Administration of Taxation. The Ministry of Commerce had urged China's cabinet to rein in currency gains and raise some rebates, a ministry official said July 14, speaking on condition of anonymity.
Yuan's Advance
The yuan's advance against the dollar in 2008 has been at more than double the pace of a year earlier.
The economy expanded 10.1 percent in the second quarter as the trade surplus narrowed 12 percent from a year earlier to $58.14 billion.
Today's survey ``may indicate the economy will continue to weaken,'' Zhang Liqun, a senior research fellow at the State Council's Development Research Center, said in the statement. Companies ``are facing increasing difficulties and this could curb economic growth and reduce employment and incomes.''
The PMI is based on a survey that started in January 2005 of more than 700 companies in 20 industries, including energy, metallurgy, textile, automobile and electronics. A reading above 50 reflects an expansion, below 50 a contraction.
The output index fell to 47.4 in July from 54.2 in June, while the index of new orders dropped to 46.2 from 52.6. The index of export orders declined to 46.7 from 50.2.
I think this article copied from Bloomberg is very telling for the next year.