Commercial Real Estate, Buying Financials, China’s “Catastrophic” Concern, No Gold Coins Left, and More!

by Addison Wiggin & Ian Mathias

  • Is the “next shoe” falling? Commercial real estate takes turn for the worse
  • Eric Fry with a chart you must see before buying any financials
  • Shares of Fannie and Freddie suffer huge volatility… Chinese economist sees “catastrophic” consequences
  • China overtakes U.S. in another “world’s biggest” title
  • U.S. Mint halts all gold coin purchases… James Turk on why, and what it will mean for your investments
  • Plus, The 5’s overwhelmed with I.O.U.S.A. comments… initial impressions of our film, below

Could it be… the next “shoe to drop,” now accelerating toward the floor?

The commercial real estate market has entered a technical correction. See for yourself:

According to the latest from Moody’s (which takes a leap of faith to begin with), the average price of commercial property declined for the fourth straight month in June. As such, its index of commercial property is down 12% from its October 2007 high. 

You’ve read in these pages and undoubtedly many others that commercial real estate could be “the next shoe to drop.” We’re clearly seeing some cracks in the facade… we’ll keep an eye on it for you. If the situation worsens, look for financials to get slammed. They still hold about $100 billion in commercial mortgage-backed securities. 

More specifically, it could be the deathblow for Lehman Bros.… at the end of the second quarter, the already desperate investment bank reported over $29 billion worth of commercial mortgage-backed securities, the most of any Wall Street firm. 

  But all is well in Lehman-land this morning. Shares were up 14% pre-market on the rumor that the Korea Development Bank is looking to buy the whole kit and caboodle. But before you line up with the rest of the lemmings…

  “Any investor who is tempted to bottom-fish in the financial sector ,” declares Eric Fry, “should take a look at this chart:

“You can see that the Topix banking index is down 80% from its high in 1989. That’s a very, very long time. Not only that, but the index rallied around 40-60% seven times during that period. Seven different times, investors believed that this index was recovering. And seven times, it did not.

“One of the reasons is that during a period of deleveraging, such as Japan suffered, equity disappears. Equity struggles. A lot of good things can happen to businesses; a lot of good things can happen to individuals; credit can flow again. It doesn’t mean equity is going to recover. Equity suffers. It goes away.

“I would strongly urge avoiding financials, or at least minimizing your exposure to them. As Chris Mayer pointed out last year, ‘The early bird gets the worm, but the second mouse gets the cheese.’”

Eric has a lot more advice on investing during this credit crisis, including one sector that appears to be incredibly undervalued. Read it all, for free, in today’s Rude Awakening .

  We noticed shares of Fannie Mae and Freddie Mac suffered incredible swings yesterday. Stock in both companies fell 20-30% in morning trading — a 20-year low for Fannie and a record low for Freddie. But only hours later, shares of both companies had completely rebounded. Freddie rose to a 2% loss, while Fannie swung up to a 10% gain.

Why? Ugh… this is madness. The Wall Street Journal published a report saying that both companies would need to refinance $225 billion in short-term debt by the end of September. In other words, both businesses probably have less than two months to live. Such a forecast — the inevitable failure of Fannie and Freddie — gave “investors” the impression that the government would have to start propping up the companies soon. A buying opportunity, evidently.

  “If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,” former Chinese central bank chief Yu Yongding told Bloomberg today. “If it is not the end of the world, it is the end of the current international financial system.”

  The U.S. stock market is still faring surprisingly well amid all the turbulence. Commodities rebounded strongly (more below) and energy and mining names surged. Most of their gains were canceled by financials and heavy energy users (ahem, airlines), and we ended up with a pretty flat trading day. The Dow and S&P 500 eked out some small gains, while the Nasdaq slipped 0.3%.

  New funding into emerging market hedge funds plummeted 72% in the second quarter, year over year. Hedge funds focused on emerging economies garnered “just” $1 billion in new investments last quarter, said data released by Hedge Fund Research today.

We take note for two reasons: It’s way, way less than the $4 billion the same funds received this time last year. And it’s much more than the $597 million that flowed into emerging market funds in the first quarter of 2008.

  China has claimed yet another of the “ world’s biggest” titles. The FT reports this morning that mainland China, not the U.S., is now Japan’s largest export destination. Japanese exports to China have risen every month since the end of 2005. In fact, trade from Japan to China was up 16.8% in July, the biggest increase since the Japanese government started keeping track in 1950.

And on the other hand, exports to the U.S. are down 11 months in a row.

  Oil prices have sagged a bit after huge gains yesterday. After leaping $6, to $121, yesterday, light sweet crude is selling for $119 as we write. As we mentioned Thursday, a weaker dollar got the ball rolling, and then it seems as though the Georgian conflict really sank into the market psyche.

  The dollar, by the way, is at a standstill today after yesterday’s drop. The dollar index, at 76.5, is a tad higher than yesterday’s score.

  Gold traded in lock step with oil over the past 24 hours. The spot price jumped up to $835 yesterday, but now rests around $825.

  The U.S. Mint has stopped selling Gold Eagle coins. As The Wall Street Journal put it, “The eagle has been grounded.” This is the first time the Mint has stopped selling them in the coin’s 20-year history.

Government officials claim sales are about 50% more than in all of 2007. Over the past few weeks especially, demand was “unprecedented” as gold dipped below $800 an ounce. Demand was so intense the Mint says it’s completely sold out.

“When I see or hear that store ‘shelves are bare,’” says GoldMoney’s James Turk, “my first reaction is that government price controls have been imposed. Price controls always create shortages. But there are no price controls on the precious metals — at least not yet, anyway. So absent price controls, the answer to dealer shortages is simply that the price of gold and silver is just too cheap.

“To explain this point, there are two different gold markets — the physical market, in which real bullion is exchanged between hands. And paper market, where people buy and sell pieces of paper purportedly backed by gold, much of which is highly leveraged. The selling carnage in the paper market from overleveraged hedge funds has created a buying frenzy by retail investors for fabricated product in the physical market, with many dealers reporting that they have sold out and cannot get their hands on coins and small bars, particularly silver.

“In other words, there is presently a huge disconnect between the paper market and the physical market. The demand for physical metal is soaring. I suspect that this disconnect between the paper market and the physical market means that gold will climb back as rapidly as it fell, creating a ‘V’ bottom.”

  Commodities of all kinds rose from the dead yesterday. We’ve already mentioned the heavy hitters, oil and gold, but check out this roundup from yesterday’s trading:

Natural gas — up 2%
Silver — up 5%
Platinum — up 6%
Copper — up 4%
Corn — up 4%
Soybeans — up 3%
Wheat — up 4%
Cocoa — up 7%.

Chances are if you owned any commodity yesterday, you’re a bit richer this morning.

  “Bravo!” exclaims a reader after viewing I.O.U.S.A. last night. “You are to be commended for putting together a film that illustrates this country’s financial problems in such a compelling and understandable way. After hearing me talk constantly about our country’s miserable financial condition, I was sure my wife had heard enough gloom and doom and would not want to spend several hours hearing more of the same. I was wrong. I was pleasantly surprised when she agreed to go with me, and even more pleased when she said after the movie that she was glad she did. Now when I gripe about what is happening in this country, she will have a better understanding of what I am talking about…

“By the way, I saw movie in Altamonte Springs, Fla. The turnout was excellent, better than I had expected. I estimate the theater was 80% full.”

  “Congratulations on a great film!” cheers another. “Although there was nothing particularly surprising for faithful readers of The 5 and the DR, like yours truly, it was a clearly presented, sobering message that needs to be received by everyone in I.O.U.S.A.

“One note of disappointment, though: I think Warren Buffett did a real disservice to the impact of your message with his remarks in the post-movie forum. He said he’d be the Pollyanna of the group, but I assumed he was kidding. He wasn’t. Too bad, he was the one guy on stage whom everyone knows and respects, and his ‘Everything’s gonna be alright’ comments served to diminish the message of the film. Can the greatest investor in the world really be that naive? Also disappointing to me was the low turnout in our theater in Erie, Pa. I’d estimate that only 10-15% of the seats were occupied. Great show, though. Here’s hoping the message takes hold… it had better!

  “I went to the theater at 6 p.m. to buy a ticket for the 7:40 showing at Lloyd’s Center Theater, in Portland, Ore. They were sold-out, and there were others milling around who also wanted tickets. I’m sorry I didn’t get to see the movie, but thought you’d like to know it was a hit in Portland!”

The 5: We’re very sorry too. You’ll probably have a second chance. Stick with The 5 for details.

  "After watching the movie last night, I can sum it up in four words,” writes a reader. “Dave Walker for PRESIDENT.”

  “I conclude," adds our last, "David Walker for president and Agora as his esteemed Cabinet!

“The  documentary was top-notch, I give it an A-. I can’t say much more than it was very well produced and that the facts delivered were truly eye-opening — even for an Agora faithful like myself. Everyone needs to see this, not just the 25 people that showed up at the Gulfport, Miss., viewing.

“In  contrast, the post-movie commentary left me quite bewildered — specifically, Warren Buffett’s comments. Every answer he gave seemed to deny that a problem really exists. At one point, my wife leaned over and asked me, ‘Is Buffett high on something? And did he just watch the same documentary that we just watched?’ Thankfully, the rest of the panel,  specially David Walker, brought the issue back to center as Buffett gave me the impression that there really isn’t anything to worry about. I sure hope he is right, but I fear that his optimism is naive and is based on the fact that he is a billionaire, plus he probably won’t be around to see it all play out. For the regular 30-year-old man in the street like myself, I am much less optimistic and, quite frankly, don’t see any resolution to this problem in my lifetime.

“Excellent movie — well worth the two hour (each way) drive.”

The 5: Heh, we’ll pass that onto David. Thanks for all of your comments. We were completely overwhelmed with your responses this morning… we’re still getting e-mails faster than we can read ’em. It certainly seems like you enjoyed the film, and we’re getting the distinct impression that you might feel differently about Warren Buffett after listening to him last night. If you missed it, you can get the Reuters recap of our town hall meeting, here.  

It’s too early to tell exactly how successful the premiere was. But no matter what the outcome, we owe you a huge note of appreciation for all your support throughout this process. Thank you very much for getting out there and helping us. And if you couldn’t make it, thanks for writing in and expressing so much interest in a DVD edition of I.O.U.S.A. We’ll know more about "what’s next" on Monday… stay tuned.


Ian Mathias
The 5 Min. Forecast

P.S. “Buffett’s comments were puzzling to me," Addison writes from Omaha. He’s making his way back today after the premiere, but he sent a quick note from the road. "He said at the beginning of the Q&A session that somebody had to play the role of the optimistic Pollyanna… but he went a little overboard. Even though he helped considerably with the trade deficit section of the movie, he downplayed the federal debt and savings deficit. And all but ignored the leadership deficit. He kept saying we can grow the ‘pie’ until everybody gets a bigger piece. I share the sentiment… but without strong leadership on the deficits we’re facing, the pie isn’t going to be growing very quickly."


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