Sunday, June 29, 2008

Real estate getting worse

As mentioned in an earlier article, ARM rates start to reset this July, and the world must ready for the oncoming expanded failure of conventional businesses in the financial industry (notably real estate firms and debt-investment, AKA financing companies in NZ). Tom Lindmark participated at the IMN Distressed Real Estate Conference in Las Vegas, and pointed out the below, as expressed by industry insiders.


In no particular order here is a synopsis of this year’s conference:

  1. No one has any idea when we will reach a bottom simply because no one knows how many classes of real estate are going down. The most optimistic guess was 2010 but most wouldn’t even hazard a guess. Some of the grey hairs think 5 or 6 years.
  2. The problems in the residential side are quickly spilling over to the commercial real estate market.
  3. The spread between bid and asked prices is as large as the Grand Canyon. Banks and particularly the community banks can’t afford to take the write-downs the bid price implies.
  4. Aside from say multi-family and really solid income producing properties (producing solid verifiable income now, not projected income) there is no debt available. There is lots of equity looking for 20% and up returns. Since these will have to be largely unleveraged, the asset price required to deliver the return is abysmally low. Further driving down implied valuations is the fact that the equity is Wall Street money with 3 to 5 year time horizons. No one thought that was achievable (with the exception of the Wall Street boys in the audience, of course).
  5. The complicated capital stacks of the past are history. Simplicity is in and you can kiss non-recourse goodbye.
  6. Builder lots are selling for improvement cost or less. Basically, the land is free. There is no debt available and the volume of transactions is approaching zero.
  7. Small and mid-level banks are in trouble. So are the big boys but the govies will take care of them? Several of the deal guys said that banks they contacted three months ago about buying assets are all of a sudden calling back. Three months ago they said everything was fine. The idea du jour is to buy the bank to get the bank’s real estate. Sounds screwy to me but I’ll write some more about this one tomorrow.
  8. Most think this is a credit driven problem, not a supply problem which was the case in 1991. They think the crunch is really going to start hitting when commercial loans mature and need refinancing. Unlike 1991 there is lots of equity on the sidelines which is a good thing. The bad difference from 1991 is that we got into this mess with a good economy not a recession. So if the economy goes south it could get real rough.
  9. Banks have been rewriting their loans and creating new interest reserves to keep the Zombies alive. The regulators have said full stop.
  10. The big buzz word is “value added” as in look at my Excel spread sheet and how it shows us increasing rents and occupancy and how much money we will make with which to pay you back. Most of the fund providers aren’t buying.
  11. Underwriting is getting tougher and tougher. As one participant said,” …if you have financing take it and close the deal NOW.”
  12. Mezzanine is going to be important as the level of available senior debt in the capital stack shrinks. Most Mezz lenders now only going up to 85%. They are also adjusting any appraisals by five to ten percent.
  13. Lot prices in the hardest hit areas are back to 2000 to 2001 levels.
  14. There is an absolute disconnect on valuations among buyers, sellers, senior debt, mezzanine and equity. Thus no deals are coming together.
  15. Appraisals are good for no more than a month as values are deteriorating so rapidly. Some felt that the appraisers were only picking up sales comps and missing the comps that could be derived from note sales. Basically, no one trusts appraisals.
  16. The Indy Mac performing loan sale that was reported to have been done at about 60% of asking price has fallen apart. Most of the bids at the 60% level were withdrawn after further due diligence. The actual prices the stuff went for is between 20% and 45%. By the way Indy Mac had current appraisals supporting their asking price.
  17. The Wall Street Wizards are proving to be particularly inept at working out real estate problems. Essentially, they don’t know anything about operating real estate. On top of that, many of the banks don’t have expertise so there seem to be a lot of bad decisions going down (much more about this later).
  18. Things are going downhill so fast that deals that were struck 3 months ago need to be restructured.
  19. Finally, the conference concluded with a representative from the Fed and one from the Office of Thrift Supervision. They dodged, weaved and evaded the hard issues. My take, reading between the lines, is that they are scared to death. Again, I will expand on this in the next couple of days.

Tuesday, June 24, 2008

The Financial Media Circus (Cramer)

This is pretty funny, and serves as a hint to newbies to avoid mainstream industry media at all cost.

Monday, June 16, 2008

Lenny Dykstra, Story of a Successful Trader

With no college education, a diet off Coke and French fries, still calling everyone “dude”, the former pro baseball player Lenny “Nails” Dykstra makes stock-trading success seem effortless. Oh, and he owns a Maybach, easily the most expensive automobiles publicly available today (close to 8 figures in USD). Is it really that easy?

Ben McGrath of The New Yorker (yes I read the New Yorker) met up with him at the St. Regis Hotel, where Dykstra shelled out $3,000 a night; they discussed fellow athletes and the upcoming “Player’s Club” magazine until Dykstra had to meet with another interviewer at Sports Illustrated, “Dude, oh my God, take a ride with me…”

Unlike majority of pro athletes, Dykstra actually learned to grow his money and prosper life after retirement, well retirement for pro-athletes tend to occur much earlier than conventional occupations. He started out interested via Jim Cramer’s passionate talks off TV, and eventually found his own niche.

Sure pro athletes make millions during their careers, yet many go broke as soon as retirement hits. Evander Holyfield probably exemplifies this out of anyone these days.

What sets Dykstra different from the rest, seems to lie in his attitude along with necessary diligence toward self learning. He did not search for some easy, quick shortcut, and he knew better than to rely on others’ opinions. Despite having never attended college, he sat down and did his homework, and reaped what he had sowed.

Lenny Dykstra is living proof that with free, independent thinking, along with tireless work ethic, practically anyone off any educational level can trade and profit off the financial markets consistently. Hell, I have more respect for Mr. Dykstra than the Ph.D. academics who sit in comfortable offices and rant about “efficient” markets all day.

Sunday, June 15, 2008

US Real Estate Worsens, Florida Sets Off

The following article by Mike Morgan, someone knee deep in the real estate industry, serves as another incentive to stay on the short side if you trade index related securities.


I was going to call this "Banks March Us Into Depression," or maybe more fitting is . . . "Complete Collapse of US Banking System." Folks, that is what we are looking at. I don't see any way around it. What we're seeing here in Florida, is your crystal ball. And what happens here, is coming to a town near you . . . soon.

This past week I didn't write anything, because what I am seeing unravel is disturbing to the point I had to question what I was seeing and hearing. So I decided to take as much time as I needed to digest it all, and then put something together for you. So here goes . . .

I could prepare volumes of spread sheets with Bernankesque numbers. I could talk about commodity prices and oil and third world politics and a dozen other metrics that all lead to the same conclusion. But let me give you a ground zero look. That's what I do best. I will leave the manipulation of the numbers to the folks on Wall Street that do it best. The same folks that have created the precipice they will soon push us off.

I spend a great deal of time dealing with Asset Managers hired by banks stuck with REOs. So as not to re-hash the events leading to the housing crisis, I will not discuss the free-money policies of the past, and I will not discuss the absolute lack of accountability in making the bad loans of the past. Let's just deal with how the banks are attempting to recover.

Unfortunately, banks are not making a realistic effort to address the crisis. That may be because they cannot. As the banks and builders have announced write down after write down, my mantra has been . . . and continues to be . . . NOT ENOUGH - NOT ENOUGH - NOT ENOUGH. I still believe that. The builders and the banks have underestimated the magnitude of the problem, and they continue to do so. Analysts continue to look at the rear-view mirror and attempt to manipulate numbers based misguided historical assumptions. NAR and the economists continue to twist the numbers, lie and then slip in prior-month adjustments without actually comparing apples to apples. But that is another article. The bankers and the fat cats on Wall Street sit back and watch the carnival, collecting fees from everyone they can snooker.

I have recently started turning away REO properties from banks and asset managers, even though hundreds of thousands of real estate agents nationwide are lined up waiting for these listings. I made the decision because we have reached a point where these listings are costing us money, and the asset managers are squeezing harder and harder . . . because they can. There are GREAT asset managers and there are incompetent ones. The majority fall into the incompetent bucket, but we eliminate them quickly. The banks, on the other hand, continue to throw away money with the bucket of incompetent managers. It seems like the mortgage brokers that pushed funny money for the last six years are now starting asset management companies. We still work with a number of asset managers and banks directly, but the list of asset managers is growing smaller as properties fail to sell. When that happens, properties are bundled up and sold in bulk or at auction. This puts further downward pressure on markets because of lower prices and the inventory was not absorbed . . . it just changed hands.

Banks cannot afford to take 50-75% hits on mortgages, and that is exactly what is happening. The precipice is here, and we are on it. Recent reports about home sales rebounding are insignificant, because no one is accurately describing the growing inventory build-up. Banks simply don't have the margins to deal with this crisis. And for that reason, we will see massive bank failures and this will snowball into a complete economic meltdown. If you have an argument against this scenario, I'd love to debate you on a live conference call. We deal with the banks. We know what is going on before the numbers show up at the Fed or any analysts desks. We deal with the public, so we hear the desperation at all levels. I listen to grown men cry about how to explain to their families that they are losing everything. I listen to people that I fear are on the verge of suicide. I read about people committing crimes simply to put food on the table. Spend a week with me, and you'll understand why there is no feasible way to avoid a Depression.

The banks will fail, just as they failed in 1929 . . . but worse because this time some of this leverage is as high as 40:1. Insurance? Where is that going to come from? There is no insurance that can cover the cost of the coming bank failure, unless we just print more money. We are two generations removed from 1929. I am talking about Biblical 40 year generations. And when you look at who we were in 1929 and who we are now, you'll realize just how ugly it is going to be. In 1929 there was a stronger base of family values. There was a work ethic that we don't see today. The generation from 1929 - 1969 grew up with a totally different set of values than the generation from 1969 - 2009. The first generation worked their way out of the Depression. Today's generation doesn't understand work. We only understand creative financing and how to live off the next generation. And sadly, that is where we are today. We are at the precipice, and we are going to push our children over the edge because we lived so far above our means and ignored all of the warning signs. We lived just like the Romans in their final days.

Harsh? Like I said, spend one week with me, and you will go home with a new outlook about life, people and the crisis that is unfolding. You will go home with a sick feeling in the pit of your stomach. Guaranteed.

Just Florida? No, but Florida is your crystal ball.

The next generation? I would like to think we will eventually build ourselves out of this Depression with nuclear plants, solar and wind farms, seawater desalinization plants new roads and bridges and state of the art cars and trucks. Unfortunately, who is going to get their hands dirty? For those that study history, how would we manage a WPA with today's generation? It will be a much tougher recovery, because we have lost the fundamentals that made us the greatest country in the world.


Monday, June 9, 2008

Property Futures Market Suggest 50% Drop

Holders of real estate backed stocks are in pain as the risks unfold. Though not very widely traded, the residential property futures market reflects current trader sentiment with cold-hard prices. According to The Guardian, they expect a 50% drop in real estate value in the UK within the coming four years.

From my experience, the UK media has displayed “less” hype and disinformation than American counterparts. Despite that, any public media should not be taken to heart. Real estate stocks will likely rally in the near term future due to heavy selling from the newbies. The article does present some interesting information, and carries some merit toward long term possibilities and hints for real estate on a global basis.

Here’s the article,

Traders Predict House Prices Will Fall by 50% in Four years

· Investments based on property 'fall off a cliff'
· Job losses hit estate agents and mortgage firms

The slide in house prices will continue for at least three years and crush the value of a home by almost 50% in real terms, according to a key index of property price futures. Indications from futures trading on long term property prices shows that the average UK home will recover its current value only in 2017.

By the end of this year prices will be down by 10% and by a further 10.5% in 2009, according to the index. Prices will keep dropping through 2010 and cut values by 23.5% when they hit rock bottom in 2011. House prices will then begin a slow climb back to current market values over a period of about six years.

If an average retail price inflation rate of 4% is included in the calculation and in addition the 8% drop in prices over the last eight months already registered by the Halifax index, the fall in values over almost four years will reach 47.5% in real terms.

The Liberal Democrat Treasury spokesman, Lord Oakeshott, said the figures revealed that property investors had little confidence in the market and were predicting steep and prolonged falls in prices.

"This government says this housing depression will be different from the early 1990s. Yes, that's right. It will be worse."

When not attacking government policy in the Lords, Oakeshott invests in property on behalf of pension funds through his investment vehicle Olim. He says he has watched the index steadily fall over recent weeks. On Friday it "fell off a cliff" after the Halifax published its latest house price survey.

Halifax said the value of a home fell by 2.4% in May, the seventh month in the past eight when prices have fallen.

The May figure spooked investors, who said prices were now falling more rapidly than at any time since the early 90s property crash. House buyers benefited from low prices until 1995 when values began to pick up.

Last week an economic consultancy, the Centre for Economics and Business Research, predicted that in 2008 almost 15,000 estate agents would lose their jobs. It said real estate output will also decline during the year by 3% in real terms, as the drop in mortgage approvals and housing transactions take its toll.

The slide is also hitting mortgage brokers, illustrated by John Charcol, which last week announced job cuts and made Katie Tucker, product specialist and one of the public faces of the broker, redundant.

The firm's chief executive, Ian Kennedy, is also reported to be in discussion with chairman John Garfield - one of the founders of the business - about his future. In January, the broker announced it was putting itself up for sale. But no buyer turned up and instead its founders were expected to inject more funds into the business.

The residential property futures market is based on the Halifax monthly house price index, published by the bank. It is an-over-the-counter market designed for banks, pension funds, insurance companies and housebuilders to trade on the future values of property. Tradition Property, a City-based property broker, operates a derivatives futures index based on the Halifax figures.

Friday, June 6, 2008

Kaizen, key to success

I found this very interesting article from a recent issue of New Yorker by James Surowiecki. Apparently for the first time ever, GM's annual sales have been outnumbered by another, Toyota. The secret of Toyota's success? Kaizen, the concept of continual, subtle, improvements, instead of the typically expected "life-changing" events.

See below for article

Article Link


In the current atmosphere of economic tumult, the announcement that Toyota sold a hundred and sixty thousand more cars than General Motors in the first three months of this year might seem like a minor news item. But it may very well signal the end of one of the most remarkable runs in business history. For seventy-seven years, in good times and bad, G.M. has sold more cars annually than any other company in the world. But Toyota has long been the auto industry’s most profitable and innovative firm. And this year it appears likely to become, finally, the industry’s sales leader, too.

Calling Toyota an innovative company may, at first glance, seem a bit odd. Its vehicles are more liked than loved, and it is often attacked for being better at imitation than at invention. Fortune, which typically praises the company effusively, has labelled it “stodgy and bureaucratic.” But if Toyota doesn’t look like an innovative company it’s only because our definition of innovation—cool new products and technological breakthroughs, by Steve Jobs-like visionaries—is far too narrow. Toyota’s innovations, by contrast, have focussed on process rather than on product, on the factory floor rather than on the showroom. That has made those innovations hard to see. But it hasn’t made them any less powerful.

At the core of the company’s success is the Toyota Production System, which took shape in the years after the Second World War, when Japan was literally rebuilding itself, and capital and equipment were hard to come by. A Toyota engineer named Taiichi Ohno turned necessity into virtue, coming up with a system to get as much as possible out of every part, every machine, and every worker. The principles were simple, even obvious—do away with waste, have parts arrive precisely when workers need them, fix problems as soon as they arise. And they weren’t even entirely new—Ohno himself cited Henry Ford and American supermarkets as inspirations. But what Toyota has done, better than any other manufacturing company, is turn principle into practice. In some cases, it has done so with inventions, like the andon cord, which any worker can pull to stop the assembly line if he notices a problem, or kanban, a card system that allows workers to signal when new parts are needed. In other cases, it has done so by reorganizing factory floors and workspaces in order to allow for a freer and easier flow of parts and products. Most innovation focusses on what gets made. Toyota reinvented how things got made, which enabled it to build cars faster and with less labor than American companies.

But there’s an enigma to the Toyota Production System: although the system has been widely copied, Toyota has kept its edge over its competitors. Toyota opens its facilities to tours, and even embarked on a joint venture with G.M. designed, in part, to help G.M. improve its own production system. Over the years, more than three thousand books and articles have analyzed how the company works, and things like andon systems are now common sights on factory floors. The diffusion of Toyota’s concepts has had a real effect; the auto industry as a whole is far more productive than it used to be. So how has Toyota stayed ahead of the pack?

The answer has a lot to do with another distinctive element of Toyota’s approach: defining innovation as an incremental process, in which the goal is not to make huge, sudden leaps but, rather, to make things better on a daily basis. (The principle is often known by its Japanese name, kaizen—continuous improvement.) Instead of trying to throw long touchdown passes, as it were, Toyota moves down the field by means of short and steady gains. And so it rejects the idea that innovation is the province of an elect few; instead, it’s taken to be an everyday task for which everyone is responsible. According to Matthew E. May, the author of a book about the company called “The Elegant Solution,” Toyota implements a million new ideas a year, and most of them come from ordinary workers. (Japanese companies get a hundred times as many suggestions from their workers as U.S. companies do.) Most of these ideas are small—making parts on a shelf easier to reach, say—and not all of them work. But cumulatively, every day, Toyota knows a little more, and does things a little better, than it did the day before.

The system doesn’t necessarily preclude missteps—in 2006, Toyota ran into a series of quality problems—and it’s possible that the focus on incremental innovation would be less well suited to businesses driven by large technological leaps. But, on the whole, the results are hard to argue with. They’re also phenomenally difficult to duplicate. In part, this is because most companies are still organized in a very top-down manner, and have a hard time handing responsibility to front-line workers. But it’s also because the fundamental ethos of kaizen—slow and steady improvement—runs counter to the way that most companies think about change. Corporations hope that the right concept will turn things around overnight. This is what you might call the crash-diet approach: starve yourself for a few days and you’ll be thin for life. The Toyota approach is more like a regular, sustained diet—less immediately dramatic but, as everyone knows, much harder to sustain. In the nineteen-nineties, a McKinsey study of companies that had put quality-improvement programs in place found that two-thirds abandoned them as failures. Toyota’s innovative methods may seem mundane, but their sheer relentlessness defeats many companies. That’s why Toyota can afford to hide in plain sight: it knows the system is easy to understand but hard to follow.


Thursday, June 5, 2008

Investment Fallacies explained by an industry insider

Excellent video of a data analyst from a hedge fund explains and unfolds the sales pitch of "holding for the long run".

Basic summary- While indexes have rallied over the decades, most included individual companies had gone bankrupt and replaced by new ones, termed "survivor bias". Therefore long-term holding does not necessarily offer any lower risk. If you bought at a top (e.g. July, 08), this might take you at least 10+ years to break even, inflation adjusted.