Housing Bubble Still Bursting, Deficits Still Growing, China Not Yet Slowing and More!

by Addison Wiggin & Ian Mathias

  • Major announcements, same old story… two head-scratching headlines from Washington
  • 2006: Biggest real estate deal in U.S. history. 2010: Biggest foreclosure in U.S. history
  • Dan Amoss and Jim Chanos on two real estate bubbles yet to pop
  • Rob Parenteau explains how the Chinese economy could stay strong… while Chinese stocks fall


  Today, we begin with this head-scratching headline from Bloomberg: “Treasuries Fall as Likely Bernanke Reappointment Reduces Risk.”

Heh. We suppose they might be alluding to an uncertainty premium, but we’re hard-pressed to think of any man alive that poses more of a risk to Treasury yields than Mr. Bernanke.

  Or this man: On Saturday, President Obama endorsed a plan, to create a task force that would in turn create another plan to reduce the budget deficit. This plan/task force/plan, which would rely on congressional approval, would likely go into effect around November, the president said.

The task force would then provide deficit-reducing counsel for the new Congress. Until then, ummm… nothing changes. If there’s a better example of how f*&$ed up our government is out there this morning, your feeble editors can’t find it.

  Back in the height of the bubble, just three short years ago, this plot of land, glass and concrete represented the biggest real estate deal in U.S. history:

World’s biggest foreclosure?

This morning, we filed it in our bulging “signs of the times” folder… witness one of the worst housing “flips” of our time:

The busted owners of NYC’s Stuyvesant Town and Peter Cooper Village returned the city-within-a-city to their creditors today.

Tishman Speyer Properties and BlackRock Realty bought the 110-building complex in Manhattan (over 11,000 apartments) for $5.4 billion in 2006. The plan was to nail up crown moldings here and there, replace some carpets and do a little painting… and then jack up rents, ride the endless wave of rising home prices and, ultimately, sell the complex to some larger fool for a couple billion more. 

You know how this ends. Most ratings firms estimate the 80-acre lot is now worth about $2 billion — just a hair off the $4.4 billion in mortgages and loans the group tapped in 2006. Now, like millions of other underwater homeowners in the U.S., Tishman Speyer had to choose today whether to hand back the proverbial keys or file for bankruptcy.

  “Real estate investment trusts are still priced at bubble valuations,” Dan Amoss tells us. “Valuations that bear little resemblance to economic reality.

“Since the Fed was so adept at easing the pain of its favored constituents — the bubble-blowing class — 2009 was the year that the REIT sector bought time by raising new debt and equity in the secondary market. Investment bankers worked overtime to promote these deals to their institutional clients. Most of these institutional investors follow outdated, static sector allocation models that ignore bubbles.

“Robert W. Baird’s real estate research team estimates that REITs raised $17 billion in equity from secondary market offerings in 2009. For those REITs that raised equity, shares outstanding rose by an average of 22%. This larger shareholder base means that the claim that each REIT share has on future profits is permanently diluted.

“But that wasn’t enough capital for the most highly levered REITs, which remain at risk of bankruptcy in a double-dip economy. These levered REITs still need much more capital to delever, and investors may soon balk at the terms offered on recapitalizations. So 2010 may be the year that REIT promoters run out of greater fools to buy secondary stock offerings at bubble valuations. Baird estimates that another $26 billion in new equity needs to be raised over the next few years. This $26 billion in new capital — if it even exists and is looking to participate in REIT secondary offerings anywhere near current prices — would translate into further dilution.”

Just last Friday, Dan added two REIT short plays to the Strategic Short Report portfolio — one that’s levered up to buy upscale hotels all across the U.S. and another that would sooner pay a monthly dividend than maintain a healthy balance sheet. You can profit if and when these REITs fall by checking out Dan’s advice, here.

  “Commercial real estate credit problems are affecting large and small banks alike,” FDIC Chairwoman Sheila Bair said in a speech last week. She expects commercial real estate problems to peak “in the coming quarters” and warned that CRE exposure will be the driver for more bank failures this year.

  Five banks failed over the weekend. That brings the total to nine so far this year.

  The FDIC now has over $36 billion in assets left over from failed banks. All the bad mortgages and loans that other banks refused to take on have been sitting in a virtual vault at the FDIC. Blair and company are fomenting a plan to package and securitize these assets and sell them, Resolution Trust Corp. style. Could get interesting…

  U.S. existing home sales crashed 16.7% in December, the National Association of Realtors announced this morning.

That’s worse than the 11.6% tax credit hangover the Street was expecting. Sales had gone up three straight months, thanks mostly to would-be-buyer fear that the first-time homebuyer tax credit would expire in November.

But there are some worthy silver linings in today’s report (usually the headline is rosy, but the details stink). Namely, the median home price rose year over year while annual inventory levels fell… that hasn’t happened since the recession began. Home sales in general rose 4.9% in 2009, the best year since 2005.

  The real estate bubble that has yet to bust — the one in China — is “unprecedented,” famous short seller Jim Chanos said this morning in a CNBC interview. “It’s really staggering. One fun fact I’d like to mention: Right now, for commercial real estate, there’s 30 billion square feet under construction. Not all of that will probably get finished… but to put 30 billion square feet in context, that would be a 5 foot-by-5 foot office cubicle for every man, woman and child in China.”

Heh, we’re sold.

BTW, Chanos made it pretty clear that he’s “not calling for an impending crash of China, or the Shanghai stock market.” Just Chinese real estate…

  The Chinese Sneeze trade was largely responsible for the plunge in U.S. stocks last week. The Dow fell 4% and the S&P 500 was close behind. Both suffered their worst week since early March 2009, right before this historic sucker’s rally began.

While President Obama’s threat of a Wall Street risk crackdown stunned stocks on Friday, it was this looming rumor of Chinese monetary tightening that really gave traders a rash. As we reported last week, there’s little tangible evidence of actual change there… but as the new saying goes, “China sniffled, and U.S. traders caught a cold.”

  “We have been skeptical that China’s policymakers are about to slam on the brakes,” Rob Parenteau wrote to members of the Richebacher Society late Friday. Rob, the steward of The Richebacher Letter, laid out his argument in four quick points:

“1) After China pushed the gas pedal through the floor in 2009 to reaccelerate its economy in the face of a severe global trade contraction, we found it untenable that it would reverse course simply because it succeeded. Real GDP growth north of 10% has been recaptured, according to the latest release — but why would we expect policymakers to slam on the brakes, rather than carefully transition away from policy stimulus?

2) China initiated a major credit tightening policy in 2004, including credit-rationing measures, with unpleasant results. With the memory of that episode still fresh in their minds, odds are they will be a little lighter on the brakes next time they decide to reign in credit.

3) Neither official home price nor consumer price inflation measures appeared to be accelerating that dramatically, and it struck us that selected real estate markets that were overheating could be better dealt with by targeted administrative interventions, rather than the blunt tool of systemwide interest rates.

4) Even through the past week, Chinese officials were publicly committing banks to another $1 trillion expansion in bank credit in 2010.

“The flurry of information that has become available over the past week does raise a more threatening profile for the trajectory of Chinese policy. But again, we doubt Chinese authorities are interested in smothering their recovery, so they will have to be very crafty about how they go about containing the forces they unleashed in their massive policy push last year. Nevertheless, recognizing institutional investors built up lopsided positions in risky assets over the past nine months, we can anticipate a sharp, but short correction in equity and commodity markets is the likely result of these developments in China.”

  U.S. stocks almost staged a successful bounce back this morning. Major indexes opened up about 0.75%… until that existing home sales data came out at 10 o’clock.

  Commodities suffered alongside stocks last week. Oil plummeted to a one-month low of $74 a barrel. Gold got slammed — just the way it did when it all hit the fan in September 2008 — and fell to below $1,100 an ounce. Both are holding steady this morning.

  “This sell-off of the last few days perks my BS detector,” a reader writes. “Granted, anyone looking at a long-term chart can see that the whole ‘recovery’ in stocks has been done on less and less volume — an obvious setup for a correction. So it was only a matter of time before it sold off. It was only a question of what would trigger it and who would begin the selling. The latter is what I find interesting.


“It seems to me that there are any number of large players that could be yanking our collective strings. For the most obvious, on the one hand, we have a plunge protection team who could very well have been involved in some of the latest run-up (call me a conspiracy nut), who, as part of government, have a vested interest in making sure that the soon-to-be $14 trillion in U.S. debt has a viable market to sell into.

“What better way to do so than to trigger another correction in equities, and thereby drive demand for ‘safe’ assets and strengthen the dollar? On the other hand, we have the megabanks, with more money than God, which have just been told by the administration that they are getting pimp slapped with all kinds of new limitations and profit confiscation. What better way to remind the government who really controls the economy than by selling off enough portfolio assets to cause a rather embarrassing drop in the stock market?”

  “I hate to expose my generosity,” one of our Reserve members wrote to us over the weekend, “but a big donation number is a good feeling to those who donate. So tack on $2,000 for the Hospital Albert Schweitzer from me.” 


The 5: Nothing wrong with feeling a little pride in doing the right thing. This morning, you were formally recognized by the local business community here in Baltimore — alongside the Orioles and the pub in which we were last embroiled in fisticuffs — for your generosity.

If you too still wish to help the people of Haiti — even if it’s to simply fill up your own karma jar — there is still plenty of need. Our fundraising effort and donation incentive remains.

Also, if you are a Reserve Member, please check your inbox for our exclusive invitation to join me at Rancho Santana on March 24-28. We sent it late on Friday and I fear it may have gotten buried in your weekend mail.


Addison Wiggin

The 5 Min. Forecast

P.S. Our friends at Odyssey Marine announced their latest deal this morning. Not only have they found another wrecked ship — the early-20th-century British cargo steamship SS Gairsoppa — but the U.K. government has officially granted them exclusive salvage rights. The Gairsoppa began its final voyage in 1940 out of Calcutta, loaded with pig iron, tea and what the Odyssey team believes is ”a very large quantity of silver.” It was sunk early in 1941 by a German U-boat near Ireland.

Odyssey has scheduled its search and salvage for later this summer. We’ll keep you up to speed on the process — and potential bounty. Heh.

In the meantime, if you care to add to your own silver stockpile — and can’t wait for any possible windfall from the SS Gairsoppa — our colleague Nick Bruyer, who works closely with Odyssey on its treasure finds, still has a few of the early release MS70 2010 Silver Eagles we were writing about last week. These Silver Eagles are the highest-quality silver coins available from the U.S. Mint — so rare, in fact, you can’t get them directly from the Mint yourself. Details here.


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