Where’s That Cracking Sound Coming From?

by Robert Williams, Publisher
Wednesday, November 18, 2009

When I saw the latest cover of BusinessWeek – “Why the Commercial Real Estate Crisis Looks So Scary” – I immediately fired off a text to my friend and Investment U colleague, David Fessler.

“We scooped ‘em by six whole months,” I texted.

Dave’s been tracking (and cautioning us about) the commercial real estate market for the better part of a year now. (You can read Dave’s June article on the commercial real estate fallout or his April article on the commercial real estate sector.)

“Last year, commercial real estate sales fell off a cliff, plunging 73%… But it’s going to get worse… much, much worse,” asserted Dave, months ago.

He nailed it. The market is indeed cracking.

BusinessWeek reported that $6.4 billion worth of commercial real

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If You Thought the Housing Meltdown Was Bad… Doug Hornig, Senior Editor, (Casey Research):

…wait until you see what’s in the cards for commercial real estate.

That’s right, the next train wreck will be in commercial real estate. Couldn’t be worse than last year’s residential market crash? That remains to be seen. But it’s coming soon, probably as early as the second quarter of next year, and there’s nothing that can prevent it. The government will intervene, trying desperately to delay the day of reckoning, and may even succeed. For a while. But make no mistake about it, that train is going off the tracks no matter what.

Every part of the sector – from multifamily apartment buildings to retail shopping centers, suburban office buildings, industrial facilities, and hotels – has accumulated a huge amount of defaulted or nonperforming paper. It’s an impossible, swaying structure that cannot long stand.

Just ask Andy Miller.

Andy

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According to a report published by Jones Lang LaSalle Incorporated (JLL), a leading real estate investment trust (REIT), the U.S. commercial real estate (CRE) market boom is likely to occur early in the next decade at the earliest. During the second quarter of 2009, CRE sales were $5.2 billion compared to $30.7 billion in the year-earlier quarter and drastically down from $114.7 billion in the second quarter of 2007. In the first half of 2009, CRE sales were $16 billion -- down 80% year over year, and down 93% compared to the first half of 2007. The decline is primarily due to the credit-constrained market, which has virtually shut down avenues like mortgage lending and other loans essential for real estate sales and refinancing. The credit crunch has widened the bid-ask spread between buyers and sellers of CRE, which has further caused deal volumes to fall ...

Yesterday, Ligand Pharmaceuticals Inc. (LGND) announced it has agreed to purchase Neurogen (NRGN) for $11 million in stock as well as certain future cash payments based on licensing deals, real estate sales and other milestones. The deal, which is expected to close by the fourth quarter of this year, has been approved by both company boards. Additionally, Neurogen shareholders, representing approximately 33% of outstanding shares, have already given their nod in favor of the deal. The terms of the deal require Ligand to issue about 4 million new shares to Neurogen shareholders, which is equivalent to a purchase price of 16 cents per common share of Neurogen. Neurogen stockholders would hold 3% of the combined company. The transaction will give Ligand shareholders access to Neurogen's partnership with Merck & Co., Inc. (MRK). Ligand will also have access to additional pipeline assets and ...

A couple of names of note reporting this morning, Eaton Corp. and Johnson Controls Inc.br /br /EATON (a href="http://www.reuters.com/article/hotStocksNews/idUSTRE56J1ZE20090720"via Reuters/a)br /br /-Diversified manufacturer Eaton Corp, a maker of hydraulics, electrical control systems and truck transmissions, reported higher-than-expected quarterly profits on Monday, but slashed its earnings forecast, citing weakness across its markets.br /br /-Eaton cited weak truck production, steep declines in European electrical markets and shutdowns at U.S. automakers. It said it expected its end-markets to decline at a faster rate than it had forecast in April.br /br /-But the company said span style="font-weight: bold;"cost cuts made it possible to deliver second-quarter earnings/span per share close to its original forecast.br /br /-Net earnings fell to $31 million, or 17 cents a share, from $337 million, or $2.03 per share, a year earlier. Revenue fell 32 percent to $2.9 billion, compared with Wall Street forecasts of $3 billion.br /br /-Eaton said ...

The market has staged a very impressive rally since the March 6th low. At that time the S&P bottomed at 666 and is now around 900. This massive rally has occurred in just two and a half months. Some talking heads in the media are now saying that this is the start of the next bull market. Many call a move of 20% or more a bull market and perhaps by that definition they are correct. However, the decline seen last year should then be called a ‘mega bear’ as the S&P went from 1576 to 666 in just 18 months.

Some market technicians like myself, that follow cycles, were looking for a rally in the market in the month of March. It is very common to see major reversals or turning points in the months of March and October. Even last March (2008), as Bear Stearns collapsed it was

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Sun Also Rises At SRZ

by The Investment U Research Team

Over the past few days Sunrise Assisted Living (NYSE: SRZ) has been skyrocketing. Since Tuesday of last week alone, the stock has risen by 120%. That’s almost 230% if you count from its bottom in March.

But what’s causing this meteoric rise?

The quick answer: Debt. Or more correctly in this case, the signal that debt won’t drag the company down.

Sunrise fueled its incredible growth through acquisitions and real estate sales. As they bought their competitors out, they would sell the land under their properties to REITs and use the proceeds to fund the next acquisition.

The problem with mountains of debt is that it requires a lot of refinancing. Like a consumer with large credit card debt who keeps balance transferring, Sunrise needs a bond market that functions. Without

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Buying Real Estate: This Century’s Greatest Investment

by Dr. Mark Skousen, Advisory Panelist

Buying real estate? Are you nuts?

Investment U Chairman Alex Green thinks so, what with foreclosures skyrocketing and prices in some places falling more than half from their peak. He says the market is “dead” for now.

But dead doesn’t mean unprofitable.

And as Baron Rothschild often said, “Buy when blood is running in the streets.”

Despite all the bad news making the front pages, real estate-related stocks and funds have been making a comeback; some are up more than 25%, suggesting light at the end of a very dark tunnel.

Equity Residential Properties, one of my favorite REITs, is up 20%. Toll Brothers - builder of high-end homes - has been volatile, but appears to be bottoming.

My basic argument for a turnaround is that the federal government has essentially put a floor under the current real estate market,

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The Commercial Real Estate Sector: As The Other Shoe Drops - Be Wary of Bank Stocks

by David Fessler, Advisory Panelist

There’s another shoe that’s quietly starting to drop in the commercial real estate sector… one that could deal a fatal blow to some of the largest banks like Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), Morgan Stanley (NYSE:MS) and most of the other big boys in the news for the last year.

But you wouldn’t know that by looking at the headlines…

Earlier this week, Goldman Sachs announced a huge upside surprise in earnings, a $5 billion share offering, and its intention to pay back federal TARP funds ASAP.

The average investor might view this as a sign that things are returning to normal in the banking sector, and be tempted to start shoveling money back into banking stocks.

Let me suggest you wait

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With non-performing loans rising at but not limited to Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), Comerica (CMA) and FifthThird (FITB), and despite a stagnant retail housing market, real estate sales of foreclosed homes are booming as a result of international investors stepping up to the plate.Why? In some markets, homes are now going for $10,000 versus the highs of 10x that amount just a couple of years ago. In some of Detroit's markets, prices below $1 have been recorded in order to attract investors. This has resulted in investors flying in from China, the United Kingdom, Australia, etc. to browse the markets. These investors are not looking for one or five homes, but upwards of 100 or more -- basically every decent and cheap home available.Simply, if the house costs less than $20,000 and can be rehabbed ...