Commercial Real Estate Needs CPR, Systemic Risk? (Joint Economic Committee)

It shouldn't be a surprise that commercial real estate and CRE debt markets continue to de-lever and re-price during this recession. Toxic commercial real estate was levered up just like the housing market and the "other shoe" is falling as we speak as unemployment increases, cash flows dwindle, Rent/FFO declines, vacancies and delinquencies increase and properties underwater become hard to refinance. Banks exposed to this toxic CRE debt will see their capital position deteriorate further. This is why the Government (essentially the taxpayer) is trying to backstop bank stress and jump start the CMBS (CRE debt securities) market.

I've been watching this market for 2 years now and this cash crunch will MURDER sub-prime CRE debt originated at 100% LTV (loan-to-value) at the height of the CRE bubble. On a positive note Big REITs recently raised equity to pay down debt (Simon Properties, Vornado, Kimco, Acadia, Kite Realty). The commercial real estate market is still distressed and might need a TALF/PPIP backstop if realized CRE deflation poses a systemic threat. Of course that would mean rigging the market of natural price discovery.

The Joint Economic Committee held a hearing (Webcast: Commercial Real Estate: Do Rising Defaults Pose Systemic Threat?. Here are quotes from the hearing. Visit link above or click the photo to be redirected to the hearing.

Denninger Featured On CNBC, Kneale Disses The Fly

This feud kind of reminds me of the East vs. West Coast rap rivalry during the mid 90s. Now it is CNBC's Dennis Kneale vs. Financial Bloggers and Dennis keeps putting fuel on the fire. Is CNBC trying to start a show that features financial bloggers? Karl Denninger who runs The Market Ticker blog was featured on Kneale's show for a few minutes based around his recent blog post. Karl made a longer reply to Kneale on YouTube. Dennis then dissed The Fly (second video below). Financial journalism implied volatility is catching a bid and there's activity in the out-of-the-money calls. So who is Suge Knight, GE

RRE's James Robinson on StockTwits Traction -CNBC Video

Venture Capitalist James Robinson (@JDrive) of RRE Ventures was on CNBC discussing tech at the Sun Valley conference. He's putting new money to work. He mentioned his recent investment in Revolution Money (a Steve Case venture). He is looking for companies that demonstrate traction and he mentioned StockTwits.
"What you are really looking for now is some sort of traction. The companies that we see at the earliest stages have, even without venture funding, demonstrated traction. If you follow Twitter there's a group called StockTwits founded by an entrepreneur named Howard Lindzon, and what Howard did is instead of doing anything other than some angel funding he went out and built a community of 100,000 people so now he can get venture funding because he has proven his concept. By the way I'm not an investor and I probably should've been". (Double check wording, starts at 3:25)

Credit Default Swap (CDS) Market Needs Transparency, Still a Good Signal

Wikipedia Definition of Credit Default Swap:
"A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument - typically a bond or loan - goes into default (fails to pay). Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy or even just having its credit rating downgraded."

Ever since Bear Stearns, Fannie, Freddie, Lehman Brothers, Merrill, Citi and AIG blew up in 2008 (which all started when two Bear Stearns structured product hedge funds blew up in June 2007 pre-Gov bailout: Bear Stearns Tells Fund Investors `No Value Left' -Bloomberg), credit default swaps were supposed to insure against losses on defaults but instead brought down the whole financial system (AIG Trading Partners Squeeze Insurer Before Bailout Bloomberg June, 09).

The Lehman Brothers bankruptcy put the nail in the coffin (Lehman CDS Settlement Disappoints - WSJ) and taxpayers ended up being the credit default swap. Here's a great article from Financial Sense on June 6, 2008 predicting the CDS crisis (CREDIT DEFAULT SWAPS THE NEXT CRISIS by Financial Sense) and Time also had an article. Also Soros warned about CDS in early 2008 in the Financial Times (more below) and Warren Buffet wrote in Berkshires 2002 shareholder letter that they were "financial weapons of mass destruction".

We Have a Recovery on the Way!

Another economic update from Walstreetpro2. Go to his youtube channel.



SPY Pierced Head and Shoulders Neckline (Chart Update)

The $SPY head and shoulders neckline was pierced. I'd be cautious here and see how it closes. Let the BOTs fight it out.


SPY


Here is a chart of the close. It pierced the neckline but closed above it with 200 day moving average support. Judgment day is coming.


Courtesy of Stockcharts.com


Related:SPY Put/Call Volume Ratio Low vs. Open Interest (July 7, 2009)
IYR, SRS Real Estate ETF Chart H&S Observations (July 2, 2009)
SPY Head and Shoulders Chart Pattern, Watch 875 Neck Line (June 28, 2009)

Rosenberg: Secular Bear Market at Halfway Point (CNBC Video)

David Rosenberg, former Merrill economist now at Gluskin Sheff was featured on CNBC. Here is the video and a summary of his thoughts.
  • 40% dead cat bounce from March to May
  • 6 points of multiple expansion during rally, not earnings driven
  • Consensus: $75 operating earnings per share priced into 2010
  • At best we'll see $50 this year in S&P earnings
  • Equities are pricing in an earnings recovery we won't see until 2012
  • $50 in EPS + 13-14 multiple = $675ish... (So, retest?)
  • Another fiscal package won't save the day
  • Had 18 Year bull market (1982-2000), we move in 18 year cycles..
  • Halfway through secular bear market in equities, w/ two price peaks (wow)
  • There will be huge spasms along the way, you can't be a buy and hold investor!

SPY Put/Call Volume Ratio Low vs. Open Interest

Look at the difference between SPY put/call open interest ratio and put/call volume Ratio via Schaeffersresearch yesterday. The $SPY put/call open interest ratio was at monthly highs and put/call volume ratio was at monthly lows. At the 7/6/09 close the SPY put/call open interest ratio was at 1.83 and the 21 day SPY put/call volume ratio was at 0.77. The last time we saw 0.77 was when SPY sold off from 89 to 68 (March 2009 lows). Look at the chart. The sentiment reading could totally flip to be contrarian in nature though. So traders are loading up on puts vs. calls but trading more calls vs. puts (21 day average? from Schaeffers). So will a volume rush into puts make put holders money? The VIX has been in a range since May (24-33) so a put premium volume spike would need to occur, or a big complacent SPY sell off.

SPY Put/Call Volume Ratio (Courtesy of schaeffersresearch.com)

SPY Put/Call Open Interest Ratio (Courtesy of Schaeffersresearch.com)


$SPY is down 1.34% as we speak and there are technical levels near by that could CRUSH the S&P if broken (June 28: SPY Head and Shoulders Chart Pattern, Watch 875 Neck Line). A head and shoulders neckline breach would bring in sellers. I'm thinking this is why traders/institutions are speculating or hedging with puts imho. You never know though. In May the put/call open interest ratio hit monthly highs while the market kept rallying, so those contracts were ripped up or a big fund pocketed some nice premium if those puts were sold-to-open (SPY May Put Pessimists Squeezed, Contracts Ripped Up).

$SPY Head and Shoulders Pattern?


Oil Put in a Double Top -Credit Suisse Sneddon (7/6/09)

Reported from BloombergTV today (7/6/09). Credit Suisse technical analyst David Sneddon said oil put in a "double top" today. "Double tops signal the trend is changing. Oil prices stalled out at roughly the same price over the last month". Sneddon sees $59 as the first support level with a potential break to $57.75.

Goldman Sachs Program Trading Code Stolen

I thought this may be of interest. According to Reuters and Zero Hedge (must read), Sergey Aleynikov, a former Goldman employee, was arrested for allegedly stealing Goldman's secret program trading codes. He uploaded them onto a German website registered by a person in London. The complete affidavit can be found at those two articles (PDF). Was this dude a quant spy? Goldman code stealer by day and professional dancer (h/t Reuters) by night? We shall see.. The story is kind of a mix between Hackers, Pi, Wall Street and Office Space. If he gets off for "accidentally" stealing Goldman's proprietary code, he should definitely play the lead role in Wall Street 3. Here's more from Bloomberg: Goldman Sachs’ Investment in Trading Code Put at Risk by Theft.
“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said. “The copy in Germany is still out there, and we at this time do not know who else has access to it.” (Bloomberg)

UltraShort Oil & Gas $DUG Testing $20 Resistance

The UltraShort Oil and Gas ETF $DUG is testing ceiling and downtrend resistance at $20. A break above $20 could bring some upside momentum. We'll see if this oil correction is for real and if it breaks below the 50 day moving average. Crude could then test $57.50-60 support/200dma, imo.

If the US Dollar breaks down, equities catch a bid, middle east tensions arise or a hurricane hits, this oil correction would be short lived. Protect yourself...

UltraShort Oil & Gas $DUG (Courtesy of Stockcharts.com)

UltraShort Oil & Gas Weekly DUG (Courtesy of Stockcharts.com)

Crude Oil ($WTIC - Stockcharts.com)

JPMorgan Strategist Lee Bullish On Cyclical Stocks, ISM Rebounds

The weekend strategy session continues. Here is JP Morgan's Thomas Lee on BloombergTV. He thinks the rebound in manufacturing data shows an industrial recovery (JPMorgan Global Manufacturing PMI, 46.9% - July 1, 2009 PDF). He sees a V-shaped recovery on cyclicals or "smoke stack" industrials given the recent rise in ISM data. From the report:
"The worldwide manufacturing sector took a further step towards recovery in June. The JPMorgan Global Manufacturing PMI — which acts a barometer of the overall health of the sector — posted 46.9, its highest reading since last August. Output expanded slightly following a year-long period of contraction." (Source)

The June ISM Manufacturing Index number increased 2% to 44.8%. The 17 month trend trend in economic activity is still contracting at a SLOWER pace. Look at the downtrend. History shows dramatic rebounds after ISM hits less than 40%. The chart does not show ISM during the 1930s. The # needs to break above downtrend.

ISM Manufacturing: PMI CompositeIndex (St. Louis Fed)


Summary of JP Morgan's Thomas Lee on Bloomberg:
  • Manufacturing is a huge generator of corporate earnings, 30% profits/9% employment
  • 2002 playbook was consumer credit expansion, 2009 recovery = global industrial cycle
  • Sees V-shaped industrial recovery pulling us out of recession
  • Will be different recovery, smoke stack industries will beat expectations
  • If ISM recovery plays out, will be upside revisions to transports, steels, auto parts, tankers
  • Lee Doesn't like GOLD, output gap and slack in terms of unemployment not inflationary
Roubini is also bearish on GOLD and inflation so keep an eye on $GLD. Also $XLI (Dow Jones Industrials SPDR), $IYT (iShares Dow Jones Transports), $SLX (Market Vectors Steel) for JPM's industrial recovery forecast.

Peter Schiff Market, $USD Video Update July 4, 2009

Peter Schiff July 4, 2009 Video Update from Euro Pacific Capital. It is always interesting to hear what Peter Schiff has to say.


Summary:
  • 80 points from head and shoulders neckline, a close below could spell a bigger decline
  • Catalyst for weakness was jobs data, lost 470,000 jobs, higher than expected
  • Gov bailouts are interfering with the correction process that will ultimately lead to hiring
  • Days of dollar rallying off of bad economic news will soon come to an end
  • India calling for alternative, in addition to Russia and China is negative for Dollar
  • **But read this: Reuters: China says dollar to remain leading world currency (7/5/09)
  • Schiff Expects economy to weaken further, unemployment rise

Other videos featuring Peter Schiff:
Peter Schiff on Jon Stewart, Yes He Was Right 6/10/09
Peter Schiff Expects a New Low in Nominal Terms (4/10/09)
Peter Schiff Says Beware of Inflation, US Dollar (3/22/09)
Schiff: Dow Hits New Low Priced in Gold, TIPS Understate Inflation (2/12/09)
Peter Schiff Compares U.S Economic Crisis to Collapse of U.S.S.R. (1/10/09)
Peter Schiff, Rick Santelli Talk Gold and US Dollar Recycling (10/23/08)
PETER SCHIFF vs. WHARTON PROF JEREMY SIEGEL (10/21/08)