Debt Rally Cracking? Equities Re-Valuing

Posted by urbandigs

Wed Aug 25th, 2010 09:51 AM

A: The party never lasts forever. There are so many crazy things going on right now, mostly bearish, that to me it feels like the ground under our feet is very 'fra-gi-le, I think that's French'. Props to anyone that gets that movie quote!

Bloomberg reports, "Debt Rally Cracking as Double-Dip Fears Haunt: Credit Markets":

The rally that drove corporate bond prices to the highest in six years is showing signs of strain as worsening economic data rattle investor confidence that the U.S. can avoid relapsing into recession.

A benchmark gauge of U.S. corporate credit risk for companies ranging from Alcoa Inc. to Wal-Mart Stores Inc. has climbed for five days, reaching the highest in seven weeks. Relative yields on corporate bonds have been little changed this month, after tightening in July.

“It’s inevitable that we fall into a double-dip recession,” said Komal Sri-Kumar, who helps manage $118 billion as chief global strategist at TCW Group Inc. in Los Angeles. “The employment situation went into a double-dip, housing is going into a double-dip” and “the next stage is the overall economy will go into a double-dip.”

Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates reached the highest in three months relative to 10-year Treasuries.
Here is a list of what I see happening right now:

  • Treasury Rally On - Investors seeking return OF capital, not ON captial

  • US Millionair Index Turns Sharply Bearish

  • Housing Tumbles as Stimulative Policies End: Existing Home Sales Drop 27.2%

  • S&P Cuts Ireland Rating: CDS Near 1-YR High

  • Capital Flight + Liquidity Worries in Greece: German Bund Yields Fall

  • Unemployment Rates Rise in 14 States

  • Durable Goods Orders Rise Less Than Expected

  • Contained Depression? Negative Debt Growth

  • VIX Rallies to 7-Week High

  • Considering the rally in debt markets we saw, built on a fed engineered bank recapitalization environment, anything is possible on the way down. There are warning signs everywhere. Contrarians like to buy in times like these, but I just get the feeling it could get worse before it gets better due to where we came from over the past 12-14 months. If this is all we have to deal with, then we got lucky. Although Im skeptical and in the re-deflating camp, lets hope Im wrong.

    Manhattan RE Needs More Inventory!!

    Posted by urbandigs

    Mon Aug 23rd, 2010 12:35 PM

    A: As discussed 3 weeks ago, the Manhattan residential real estate market saw a slowdown across all metrics: inventory is down, sales pace is down, pace of listings taken off market is down, and pace of listings coming on to market is down. Clear signs of a seasonally slow summer. Typically the market ticks up again after Labor Day, but even that takes a few weeks to notice. Given the sharpness of this slowdown, its fairly easy to predict that activity has no where to go but up from levels seen here. As of today, I see only 639 contracts signed in the last 30 days; to put that into perspective, that is down from around 1,650 contracts signed in the month of April. There is no better measure of 'current demand' out there that I can think of than the pace of listings going from Active to In Contract.

    Here is one more sneak peak at a chart that measures the monthly pace of listings hitting the ACTIVE marketplace from an otherwise off-market state; notice the slowdown in the last 4 months from over 2,500 listings coming to market to around 1,750 listings in July (updated Sept. 15th, 7:39pm):


    But what about August? We need more real time data!! No problem! We designed our system to also show you the daily changes the Manhattan markets are seeing, as brokers update their listings from Active to Off-Market to Contract Signed and to Sold & Closed. In the above chart, I put a magnifying glass over August that leads to the 30-Day Broker Update box that is an integral part of our new platform. It tells you changes in the very short term. Notice that when we get more real time and see how many listings are coming to market in the past 30 days, it's down to 1,149! So, when the August bar gets added to this chart, it will likely be around the 1,200 mark - falling further from levels in July.

    In short, Active inventory is declining as supply is simply not coming to market right now. Very seasonal. For Manhattan, I currently show Active Inventory at 7,013; down another 8% in the last 3 months. Expect this pace to rise again as we get past Labor Day and into October & November. In the meantime, motivated buyers will just have to deal with limited options for a few more months.


    Posted by jeff

    Sat Aug 21st, 2010 09:20 AM

    **Since March 2010, Mr. Bernstein has served as Senior Vice President, Research, for AH Lisanti Capital Growth, LLC, a registered investment adviser. This commentary solely represents Mr. Bernstein’s views and opinions as of August 21st, 2010, does not constitute investment advice and does not depict the views of AH Lisanti Capital Growth, LLC.


    Yes, believe it or not, according to data released by the Federal Reserve earlier this week, loan delinquencies appear to have peaked (View image). In Q2 2010, for the second quarter in a row, delinquent loans as a percent of all loans declined (on a non-seasonally adjusted basis). Delinquent loans began their ascent from a historical low of 1.5% of all loans reached in Q2 2005, climbing relentlessly until Q4 2009, when they hit a hellish 7.5% of all loans. During the previous real estate and credit crisis of the 1980s delinquency levels vacillated at very elevated levels above 4.6% for 6 years before peaking at 6.3% in Q1 1991. This was due to the rolling real estate recessions that swept across Texas/Oklahoma/Colorado, southern California and New England in the late 1980s, followed by the commercial real estate debacle of the early 90s. While two quarters of decline may not be indicative of a peak from a historical perspective (data back to Q1 1985), in this case I believe that charge-off patterns indicate cause for optimism. Just to review a few banking terms used to describe the formation of bad loans and their disposal:

    1) Loans go delinquent, which means that people stop making their monthly payments.

    2) Banks begin to reserve funds to cover whatever losses they believe are likely to form as a result of delinquency.

    3) A small number of loans go from delinquent or "non-accrual" back to accrual status when the bankers remind the borrowers of the consequences of not repaying their loans.

    4) Delinquent loans eventually go into the foreclosure process and are "charged-off" by the bank. Which means that the bank makes an estimate of what its loss on disposing of the loan is likely to be and takes a charge to its earnings to reflect the expected loss. The charge off is merely an accounting entry and does not necessarily indicate that the bank has disposed of the collateral underlying the loan. It does mean, however, that the bank is forced to prepare itself to take the eventual loss in terms of having capital in place to net against it.

    5) The bank forecloses on the borrower, gets title to the property back and actually disposes of the property. The size of the loss incurred versus the amount loaned is referred to as severity. In some cases the amount charged off was larger than the bank's ultimate loss and some or all of the charge off is reversed. In some cases it is worse and an additional charge off is required.

    As is notable from the chart of charge offs on all loans (View image) banks have ramped up the amount of loan charge offs much faster in this credit crisis than they did in the late 80s/early 90s, despite the ultimate peak in delinquencies being only a little higher (and potentially similar in magnitude as the prior stretch of high delinquencies lasted a very long time). This indicates to me that, despite what we hear about "extend and pretend", at least from an accounting and capital raising perspective, banks are being much more aggressive in preparing to deal with their delinquent loans (there are subtleties relative to extend and pretend related to maturity defaults we could discuss, but actual delinquencies are being dealt with). This lays the groundwork for expanding credit and general economic growth which would forestall another wave of delinquencies. Indeed as of the July 2010 Federal Reserve survey of bank lending practices we are already seeing bank lending loosening up just a little.

    I would note that all the categories of loans I have been tracking for the last couple of years have seen delinquencies decline from recent peaks including credit card loans, commercial and Industrial (C&I) loans and most importantly residential loans, which have by far and away been the biggest problem for the economy and the banking industry.

    This quarters' data from the banks supervised by the Federal Reserve (which include state-chartered member banks, bank holding companies, foreign branches of U.S. national and state member banks, Edge Act Corporations, and state-chartered U.S. branches and agencies of foreign banks) show that residential loan delinquencies declined quarter to quarter for the first time since Q1 2007, as illustrated in the chart below.


    All thank god and say ye amen!

    Perhaps with loan delinquencies finally headed in the right direction and banks aggressively reserving for and charging off their bad loan portfolios, bad loan disposition will begin to pick up and new lending can begin to accelerate. It is difficult to see past the current lull in the economy and the obnoxious action in the stock market, but with everyone looking for the end of the world, the contrarian in me prefers to focus on the positive data points that are being ignored.

    Give Me Yield!

    Posted by urbandigs

    Mon Aug 16th, 2010 09:53 AM

    A: The fed once again has engineered an insatiable and dangerous 'search for yield'. As the carry trade and risk trade are on again, its clear the fed will do anything and everything to a) try to recapitalize the banks and b) engineer demand for risk assets. There is another term for this, 're-inflate' an otherwise deflating economy. For those following the bond markets, you have to wonder where one goes to find yield these days. Oh, and the 10YR is yielding about 2.6% right now which means record low lending rates are likely to cause some 'broker spin' on how wonderful a time it is to buy a home.

    From Business Insider, "John Hussman Warns Investors Against Reaching For Yield In The Corporate Bond Market":

    Just as dividends have to be evaluated in relation to the earnings available to cover those dividends, and the stability of those earnings, investors wishing to hold corporate bonds for additional "pickup" in yield should pay close attention to earnings stability, cash reserves, and overall debt burdens. We would emphatically avoid the debt of financials and cyclicals that are prone to massive "extraordinary" losses that can quickly wipe out available liquidity.

    While corporate cash levels may very well reduce liquidity risk for companies that would otherwise need to raise funds in a tight credit market, investors should not ignore that the overall debt burden of U.S. corporations is higher than it has ever been.
    In other words, beware the 'search for yield'. Companies are taking advantage of these times and piling up cash in an attempt to avoid a future liquidity squeeze should one occur again. By the way, Lutnick had it dead right back in mid-2009, that deflationary pressures "would 'constrain' treasury yields and that talk of a bubble is 4 years early..."

    Mish recently wrote, "I do think corporate bonds, especially most junk is playing for the greater fool. In regards to treasuries, there is going to be an exit problem for sure, but that could be years away. In Japan, yields stayed low for a decade. Why can't it happen here? This is indeed uncharted territory thanks to the Fed pushing and pulling levers in a manner it does not understand. William Black, a former bank regulator, is one person who does understand."

    What Mish refers to is the discussion William Black had with Aaron Task:
    Aarron Task: In practical terms, what does the gutting of that rule mean for the banks?

    William Black: Capital is defined as assets minus liabilities. If I get to keep my assets at inflated bubble values that have nothing to do with their real value, then my reported capital will be greatly inflated. When I am insolvent I still report that I have lots of capital.

    Aaron Task: You can just keep kicking this down the road and have stagnant economic growth?

    William Black: Geithner's original estimate was $2 trillion and of course things got much worse that their original estimates. The IMF estimates were in the $3 trillion range. So, there are trillions of dollars of unrecognized losses under these guy's scenarios. There is a huge slug, far more than they can pay for. What they are doing instead is these stupid subsidies for the biggest banks, with essentially no political oversight. It works, for the banks but it's really bad for the economy. It diverts money from small businesses, large businesses, and entrepreneurs.
    That's one way of looking at it. Another way of looking at is saying the fed is engineering a carry trade environment in an attempt to 're-inflate' crappy hidden asset values to levels that are not so damaging. To do so you must engineer an environment where money chases yield - hmmm, sound familiar? Recall what one of my hedge fund buddies told us back in March:
    "The carry trade that's on now has nothing to do with the FX carry of old. It's that a US bank can have illiquid assets on it's books at 40 when they are worth 10. They just make $10 a year for 3 or 4 years and write down the investment a little bit more each time around while still able to show a profit. So long as nothing drastic happens eventually they'll have it written down to market. That's why even if you bid 15 for it you can't get them to sell it. Yes the carry trade is on, but if banks can earn their way out then who cares?"
    Strange times indeed and I just dont see how the fed gets out of this thing without lots of pain and lots of moral hazard.

    I think The Weeks 'Deal Signed' Award Winner Is...

    Posted by urbandigs

    Tue Aug 10th, 2010 05:54 PM

    A: Why not? With permission, Id love to start doing the "Great Deals" and the weeks "Best New Signed Deal" again, to kind of mix it up a bit. What do you guys think? Is there room for that kind of content here on UrbanDigs? I guess I think this way because I know the site is about to get 'all data' on you guys very soon. But, its helpful to ask and see what you guys want to hear about. Any tips in the comment section are appreciated! On to what looks like could be this weeks Best New Signed Deal - the PH at 459 West Broadway.

    459 W Broadway PH Was Asking $16.5 Million

    Marketed by Keith Copley at Sotheby's


    In just over 3 months too, nice job Keith! The markets general trend shows a very seasonally slow market these past few months - which also happened to be two very hot and humid months with everyone getting out of the city on weekends. So its nice to see some big deals getting done. Lets check on the markets as we get through Sept and October before making any calls on significant price action.

    Stocks or Bonds? And We Have Our Answer...

    Posted by urbandigs

    Tue Aug 10th, 2010 02:32 PM

    A: It all becomes clear why bond markets disconnected so much from equities recently. The reason is because the marts sniffed out more QE by the fed, and today's announcement confirms the new plans.

    Via Bloomberg, "Fed to Reinvest Mortgage Proceeds Into Long-Term Treasuries":

    Federal Reserve officials decided to reinvest principal payments on mortgage holdings into long-term Treasury securities, making their first attempt to bolster growth since March 2009 to keep the slowing U.S. economy from relapsing into recession.

    “The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in a statement in Washington. “To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level.” The Fed retained a commitment to keep its benchmark interest rate close to zero for an “extended period.”

    With growth weakening in the second quarter and company job gains in July falling short of estimates, today’s step signals that risks of a downturn have increased enough for the Fed to delay its exit from unprecedented stimulus. Chairman Ben S. Bernanke told Congress last month that the Fed was “prepared to take further policy actions as needed.”

    The Fed said it will “continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.” The reinvestment policy applies to agency debt and agency mortgage- backed securities held by the central bank.
    Bonds were pricing that in over the past month and the moves today are being amplified by the announcement. Sometimes its buy the rumor, sell the news and other times the news sends the trend into euphoria. Risk assets may get another ride with this news, and explains why stocks held their own while bond markets seemed to be pricing in economic weakness ahead.

    How long the chase for yield goes on for, is anybody's guess. For now, party on!

    Who's Right: Bonds or Stocks?

    Posted by urbandigs

    Thu Aug 5th, 2010 01:52 PM

    A: Wow, talk about the bond markets and equity markets showing diverging signals. The bond markets are warning of deflationary risks and a slowdown, while equities just seem to do their irrational march higher. If history is any guide, its usually stock prices that are mispriced; like it was in late 2007. So what do you think is going on?

    It was only 3 days ago that David Rosenberg said: "One has to question which asset class has it right – stocks or bonds. It is extremely difficult to square a sustained economic recovery which is what the equity bulls are telling us with a $38 billion 2-year note auction that was sold at a new record low-yield of 0.665% (as was the case on Tuesday)."

    So, Are bonds right? Or are Stocks right? What is being priced in right now? Deflation or a simple pause in an otherwise ongoing recovery?

    Barron's "Stocks Ignore Green Shoots' Turning Brown", discusses:

    "What's remarkable is that the fixed-income and currency markets have taken due note of the signs of economic slowing, bringing down bond yields and the dollar, while the stock market rallies on its merry way. The Dow Jones Industrials have been able to hold onto Monday's 208-point pop through Tuesday and Wednesday's somnolent sessions, putting it within 6% of April's peaks.

    In the bond market, however, the two-year Treasury set another record low of 0.53% Tuesday and the benchmark 10-year note remains well under 3%, at 2.95% Wednesday. It is quite puzzling how equity investors see the proverbial glass more than half full while their counterparts in the fixed-income and currency markets see it half empty. "
    Is it possible bond markets are pricing in future weakness that triggers more QE by the fed, while stocks hold on to gains due to the powerful short term effects that comes with debt monetization policies? Will the chase for yield have a second wind, driving money into risk assets? Are the equity markets pricing that in now? But how can that be, if bond markets say money is fleeing to safety? This is the divergence and what I'm curious you guys think about it.

    Here are some new bears:

    Pimco's Mohamed El-Erian via Bloomberg's, "Pimco’s El-Erian Says Chance of U.S. Deflation Is 25%":
    “I do not think the deflation and double-dip is the baseline scenario, but I think it’s the risk scenario,” said El-Erian. Companies are accumulating cash and individuals are saving, making it tougher to counter deflation, El-Erian said. That reduction in private-sector spending makes government policies to stimulate the economy less effective, he said.

    John Paulson via Bloomberg's, "Paulson Said to Pare Bets on Recovery as Main Funds Decline :
    Billionaire hedge-fund manager John Paulson, whose $32 billion firm has been betting on an economic recovery by 2012, has pared bullish bets across his funds, according to a person briefed on the investments. Paulson also cut bullish bets in his largest funds after they declined this year, the person said, asking not to be identified because the information is private.
    Sounds like Paulson had a bunch of stop levels hit, will take the loss and doesn't trust this market right now. Here's what I know:
    We Peaked --> We Crashed --> We Troughed --> We Reflated --> We Seem To Be Re-Deflating ---------> what's next?
    I think we are Re-Deflating and that this process will see the 'dull' side effects that come after periods of extreme stimulus. It will be more drawn out, less sexy, and not subject to the severity of the shocks we experienced in 2008-2009. I think it will last years and we will have small waves along the way. I'm certainly not in Prechter's camp!

    Remembering Joe Ferrara

    Posted by urbandigs

    Wed Aug 4th, 2010 02:52 PM

    The digital real estate world is saddened with the loss of one of its more inspirational and encouraging founding fathers, Joe Ferrara, founder of Sellsius Real Estate Blog. Joe lost his fight with cancer last evening. He will be deeply missed.

    Joe was a champion of transparency, a wonderful speaker at the Inman Conferences, and a great friend to anyone he encountered. He really was the kind of guy that truly cared about others, helped educate others, and would put his time aside at a moments notice to sit down and talk about whatever you wanted to talk about. A true people person. I first met Joe in 2006 at the Bloggers Connect and Inman conferences and we connected immediately. I must admit, my favorite times with Joe were with him and the real estate gang after the conferences in NYC and San Francisco. We had some great times and I'll never forget the Blog Tour USA that Joe & Rudy organized in 2007 to promote "blogging, real estate bloggers, real estate agents, Sellsius°, the Inman Bloggers Connect and more." Here is one of our pictures together:


    Its rare to find someone that gets behind others in such depth and consistency that Joe did. I know his legacy will live on purely because of all the people he touched over the last 5 years or so as the online RE community grew by leaps and bounds. Joe was right in the middle of it. I am thankful to have crossed paths with him.

    My sincerest condolences and prayers go out to the Ferrara family. Please visit the following site if you wish to DONATE TO JOE'S MEDICAL EXPENSE FUND, to try to make this difficult time a bit easier for his family.

    Rest in Peace Joe! 'I'll catch you in another life brother!'

    A 'Seasonally' Slow Manhattan Summer So Far

    Posted by urbandigs

    Mon Aug 2nd, 2010 09:06 AM

    A: Its very clear that this summer has seen a noticeable slowdown in 'sales pace'; especially compared to the activity in the first four months of 2010. But I would like to dig a bit into why the drop in sales pace should be somewhat muted by a drop in inventory levels as well. Like the after-effects of a stimulus plan, the surge in activity from Feb-April is being followed by an overshoot to the 'dull' side later on. Well that 'later on' seems to be here and while the summer is hot, it seems sales pace is not. However, we should use caution before interpreting a slower sales pace to mean a new move down in prices is upon us. I'll discuss why below. Unless there are sellers out there with serious pressures to liquidate, I say what we got here is 'a very seasonally slow summer'. We should wait it out before making bold predictions on price action - although I'm sure we can give back a bit of the reflation. If this sales pace continues apace after Labor Day and macro forces deteriorate with it (equities take a sharp move down), then we have something to discuss.

    First, let me show you some sneak peaks so you can see why I am thinking this way. The Broker Year-over-Year Contracts Signed Charts will show us the realtime movement of Manhattan property from ACTIVE to CONTRACT SIGNED, as the brokers update the status of their sales listings:


    Looking at this form of 'sales pace' chart, the downward trajectory looks ugly and may lead some to believe a noticeable drop in prices is inevitable - similar to how a drop in sales volume after Lehman failed in Sept '08 led to a big price adjustment across all price points. Outside of seasonality which always should factor into our thinking, I would be wary of making bold price predictions for three main reasons:

    1) First, before Lehman's failure in late 2008, Manhattan property was still trading right near peak levels - not so today. We always should keep in mind where we are coming from. In other words, today we are coming from a market that adjusted and then reflated a bit - not from a market trading at peak levels. Therefore its likely we will see less downward pressure should any new adjustment process be in the making.

    2) Second, the level of fear floating around the environment two years ago versus today is quite different; today we do not fear systemic collapse or risk of a true depression. Rather today, a reflation mentality still seems in tact. The question is whether or not you believe in it.

    3) Finally, the pressure to liquidate combined with a negative wealth effect of a plunging equity market is highly unlikely to mimic what happened from late 2008 to early 2009. Recall in that period, stocks were on their way towards a 45% nose dive - so ask yourself, do you see equities doing a similar move over the next 6-9 months causing the same level of panic?

    In every market there will be sellers that must sell, sellers that want to sell, and sellers that are testing for a certain price. The confluence of factors that allowed an extreme move post-Lehman to occur, just doesn't seem to be in place right now. With that said, I think the mini-frenzy that produced some stronger than normal bids during Feb-April is clearly over. Its likely we see continued upward pressure in quarterly reports into late 2010 or early 2011, whenever the lagging deals eventually close and get caught by public record.

    Now, the market is also seeing a move down in measured Active Inventory levels. Nothing major, but a decline in inventory nonetheless. I will not disclose the rules we put in to measure active inventory right here (you will have to wait for launch of the new site), but people should know that rules MUST be in place to properly measure what should be counted as active in this market - for example, a listing that is set to ACTIVE internally yet not updated by the listing broker in 90 days or 180 days, should NOT be counted as active! Those are stale, old listings more likely off the market yet never updated by the listing agent. Bear with me here.

    Movement in sales pace should be analyzed with respect to relative movements in active inventory. What I mean is, imagine if sales pace stays constant but active inventory increases by 15%. Although sales pace did not change, one should interpret that as a slightly weaker market because demand is not meeting up with supply the way it did when inventory was 15% lower. On the flip side, if sales pace rises 10% and inventory falls 10%, that should be interpreted as a quickly strengthening market because supply is not keeping up with the pace of demand. These relationships could be due to seasonal factors or they could also signal a shift in the markets.

    With me so far? One of the cooler charts we designed was what we call the Active-to-Pending Sales Ratio. It could be thought of as a reverse Absorption Rate chart with an equilibrium right in the middle. It will signal a weakening market when the ratio rises above equilibrium and signal a strengthening market as it falls below equilibrium. But it should factor in how different market forces may be enhancing one another or canceling each other out. Not a bad measure of volatility as well I guess.

    So here you go, the Active-to-Pending Sales Ratio Chart since January, 2008:


    First you notice the huge bulge that shows the severity of the adjustment Manhattan real estate experienced post-Lehman - pending sales fell about 70% while inventory rose about 30% during that phase, causing this ratio to surge with that weakness. The reflation that occurred in mid 2009 is also there. Finally, in the last month or so we see only a slight move up as sales pace noticeably fell. The main reason why this trend did not move up further, is because active inventory fell about 7% in the last few months; somewhat muting the effect of the drop in newly signed deals. It seems more of a seasonal thing than a 'market is about to see an adjustment' thing. When viewing the data trends as a whole, rather than piece by piece, I can confidently say that the pace of brand new listings hitting the marketplace in the last few months has slowed big time - and with it, deal volume.

    Let's wait a bit longer before changing views or declaring inevitable price adjustments in our near future. For those that must sell soon, enjoy the fact that inventory is declining but get aggressive on price because the pace of signed deals is telling me that buyers are being very patient right now or taking a break for the summer. It may be quite difficult to procure that strong bid for any property mis-priced and with no special features to offer.


    Posted by urbandigs

    Sun Aug 1st, 2010 11:56 AM








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