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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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This post is a guest contribution by Asha Bangalore* of The Northern Trust Company.

The main aspect that stands out in the October 2009 Senior Loan Officer Opinion Survey is that lending conditions were less tight than survey results of July 2009 indicated and there was a substantial improvement from the October 2008 survey when credit markets had frozen. The net fraction of banks that reported tightening standards on commercial and industrial (C&I) loans for large firms dropped to 14% during October from 31.5% in July and was noticeably below the peak of 83.6% reported in January 2009 (see chart 1). A similar reduction in the number of banks reporting tightening lending standards was reported for C&I loans to small firms (see chart 1).

However, demand for C&I loans continued

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Our friend Andy Rothman from research firm CLSA sent out an interesting chart last week following the release of Chinarsquo;s macroeconomic data for the month of September. As you can see from the chart, private investment (Non State-Owned Enterprises) growth accelerated to 37 percent on a year-over-year basis, a more rapid rate than that of state-owned enterprises. This is the first time wersquo;ve seen this happen since October of last year and it is the fastest rate of growth since November 2007. A more confident private sector should not only make Chinarsquo;s ongoing recovery more sustainable in a time of diminishing government-mandated stimulus, but also facilitate the structural transition of the Chinese economy toward private consumption. The private investment revival is largely driven by the real estate sector, which has seen inventory levels drop in major cities like Beijing and Shanghai. CLSArsquo;s on the ground survey revealed that 50 percent of middle-class families ...

I just read a mind blowing article. This is one of the most intense rants I have ever seen. Yet the sad part is the author is not exaggerating. Hat tip to Stewart Dougherty, this piece is an eye opener. I have excerpted the best part: There is accumulating evidence that the Washington – Wall Street moral hazard experiment has gone disastrously wrong, and that just like any other accidental discharge of a deadly virus, the moral hazard virus is now loose and swiftly propagating throughout society. By so blatantly colluding with Wall Street, Washington has lost all moral authority, and the people now have only one place to turn: themselves. An ethic of, “If they can do it, so can I,” is spreading, as people realize that fabric of American society has been shredded and replaced by a free-for-all mentality whereby everyone must fend for oneself in ...

Last week, Brazil’s leading diversified national homebuilder Gafisa S.A. (GFA) reported positive financial results for the second quarter of 2009.

The company has been growing fast to emerge as market leader in the construction/incorporation business in Brazil. During the quarter, GFA reported a yearly growth of 54% in net revenue in Brazilian reals. However, the number of project launches fell 56% year over year based on continued focus on sales from inventories. Net income increased 35% year over year and reached R$57.8 million from R$42.8 million in the year-ago quarter. EPS increased to R$0.44 (US$0.42) from R$0.33 last year. However, it was below the Zacks Consensus estimate of US$0.48.

Despite difficult market conditions in the second quarter, Gafisa could post reasonable figures. We do believe the Brazilian real estate business is already recovering based on extensive Government support and lower interest rates. Thus, we foresee better results for

...

Before the market opened this morning, Wells Fargo (WFC) reported that second-quarter 2009 diluted earnings were 57 cents per common share, compared with 56 cents in the first-quarter 2009. Net income came in at $3.17 billion, compared with $3.05 billion in the prior quarter. The results were ahead of the consensus estimate of 34 cents per share.

Large banks, including WFC, Bank of America (BAC), Citigroup (C) and JP Morgan (JPM), have benefitted from the surge in mortgage refinancing during the last two quarters. However, this revenue source is expected to taper off as the rates are creeping up now. WFC reported mortgage banking income of $3.0 billion.

Credit quality deteriorated further and losses rose sharply during the quarter. The bank expects credit losses and nonperforming assets to increase further, though some moderation was visible. Net charge-offs rose to $4.4 billion (2.1% of average loans) from $3.3

...

There has been much talk about an economic recovery lately. Without analyzing WHETHER a recovery is even validated, the focus of attention has shifted to the actual shape of a recovery. Rather than getting caught up by wishful thinking, we actually bothered to take a look at the big picture. Sooner or later, the missing link in the above chain of reasoning will become painfully obvious…..

Those who fail to learn from history…

This bear market has often been compared to the 1972-1974, or 1980-1982 bear. The 80’s bear was fairly shallow with a 27% decline in the S&P 500 (NYSEArca: IVV). The 70’s bear did send the S&P 500 tumbling by 48%.  So far, the current bear market has melted the Dow Jones (top to bottom) 55%. This exceeds the 70’s and 80’s bear, and makes them unsuitable for comparison purposes.

The

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The real estate sector has been considered off-limits to most investors during the last year. But according to recent data and indicators, REITs are worth a look.

Now that winter is over and it is officially lawn-mowing season here in the Northeast, it is much easier to determine which homes are in foreclosure.

On my way home from the office, I pass at least half a dozen homes with grass so high and so out of control it is going to take a hay baler to get things back to normal. On their front door is a little sticker explaining the situation.

But if today’s economic data is any indication, it may not be much longer until a new set of mortgage-paying owners are zig-zagging their shiny, new lawn mowers across the yard.

According to the National Association of Realtors’ pending home sales index, which jumped an unexpected 6.7% to a reading of 90.3

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Today we are featuring top-performing "Real Estate" equity mutual funds, which primarily invest in equity securities of companies that are part of the real estate sector, real estate services and REIT industries.

Investors can find such funds by checking out the entire list of the Zacks #1 Rank Real Estate Equity Funds.

3 Excellent Examples

Fidelity Real Estate Income (FRIFX) seeks higher than average income with capital growth as a secondary consideration. The fund is non-diversified.

Mark P. Snyderman has been the lead manager at the fund since its inception in February 2003. The fund has an expense ratio of 0.97%.

Ventas Inc. (VTR), MFA Mortgage Investments Inc. and Annaly Capital Management Inc. (NLY)are among the fund's top holdings.

Commonwealth Real Estate Securities (CNREX) was incepted in January 2004. The fund seeks long-term capital appreciation and current income.

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