…yesterday, Mort Zuckerman was on Bloomberg and very agitated about how overly optimistic the markets are on the economy. Today, former assistant treasury secretary Richard Clarida was on Bloomberg and calmly explained how an economy that depends on the consumer for 70% of its GDP cannot have a ‘V’ shaped recovery, especially as the unemployment rate continues to rise. All day yesterday TB heard more intelligent people than the thirty-somethings who weren’t even around for the 1987 crash tell us how rosy the future is…the immediate future. These ‘kids’ have also convinced some of the nations well-regarded money managers to jump on the bandwagon…well rightly or wrongly, TB isn’t going to make that leap and the market action of the last few days makes the future of the stock market look tenuous at best…especially after 11 straight up days with just a slight rollover yesterday (except for the two Nasdaq indices and the Russell 2000…the NDQ 100 extended it’s rally to 12 days with just one minor blip but has created a quadruple top at 1600-1609 while the closes have been between 1599-1601…don’t look down). But can this rally continue with the naysayers becoming more open? Depends.
First, let’s look at what Zuckerman said. He said we are in for a huge problem in commercial real estate and that it isn’t the rising vacancy rate that concerns him but the volume of commercial real estate loans that have to be refinanced this year. A day earlier Bloomberg put that number at $165 billion! Even though the new ‘smart’ buildings are attracting tenants from older more stodgy buildings they are at sharply reduced rents and occupancy means little if the bankers don’t wish to lend to you. Furthermore, many of these properties have been packaged into commercial real estate REITS which due to mandatory 98% distributions of profits have little cushion and it is further minimized by problems of refinancing. Look, the banks are already loaded with OREO’s from the housing bust and the last thing they want is to take on a commercial property that could also go bust.
Zuckerman, along with Sam Zell, are arguably the two most brilliant real estate investors of our time. Zell sold out his Equity Office Properties which he cofounded with Robert Lurie in early 2007 to Blackstone Group for $39 billion. Blackie immediately broke it up and sold it at a big profit to other investors. TB heard Zell when interviewed by Maria Barteromo respond to her question of whether he felt bad after it rose. He said that he did not (after all he made a fortune off EOP), but that he sold because he thought prices were going to drop…unfortunately, for him he bought the Chicago Tribune and his antics with the Cubbies have not endeared him to Chicago residents….but TB did not say he was a brilliant investor…merely a brilliant commercial real estate investor. Zell must have seen the wave of ‘crap’ housing loans some of which were beginning to default on the first payment! So if you are bullish on real estate, commercial or otherwise, you must think you are much smarter than these two veterans…ah but isn’t that what youth is all about?
But can’t the stock market stay up here…at least for a little while longer? Of course, but that doesn’t mean that is where it should be. Not on the mixed earnings reports coming in lately and those that are beating on the bottom line are only achieving that by cost-cutting. Which brings us back to Clarida. With all that excess capacity out there, and unemployment rising…albeit at a slower rate, does GDP turning positive really matter? Not from the current levels and hasn’t the stock market already anticipated an inflection point in GDP and has perhaps seen it already in other indicators which are reported monthly rather than quarterly?
The secret, IMHO is that the fear is out of the market…but is it being replaced by complacency? True, we will not have a financial Armageddon but is that a reason to buy stocks at double digit multiples…that only look good when you use the companies ‘estimates’ which we have already seen are worthless….CEO’s are always optimists. That is what they are paid to do and they are centivized nicely for doing so.
Enter high frequency trading…where trading firms receiving rebates for using electronic platforms to provide additional ‘liquidity’ make money buying and selling at the same price. That is why the volume on a few stocks like Citi, BofA, and CIT mainly is routinely 60% or more of total volume on the NYSE. Yesterday, Citigroup (C) had total volume of 1,035M shared or 82% of the total volume that traded on the NYSE! Plus another 119M of the new Citi shares so that combined this was over 90% of the volume. BofA added another 240 million or 19%…do you think that many shares were actually bought and sold on a ‘net’ basis??? Not hardly. That is the ‘illusory’ liquidity provided by high frequency trading and why it must be regulated. Who are the defenders? Those who are profiting from it…Wall Street brokers, Citadel, Renaissance and a few others. If you call that liquidity I suggest you look at the bid/ask spreads on all but the most actively traded stocks…and ETF’s. You can drive a truck thru the spreads lately. Be careful!
But that is only part of the story. The rest lies with the low volume as we continue to deleverage…and no, Virginia, that deleveraging is not over yet. Banks are still way too overleveraged and brokers are merely making money off fees…that is the old way pre-2005 when they began to create all those exotic derivatives and we know what happened to those. While these fees are sustainable they only good in comparison to the last few quarters…even for Goldman, which has been distorted by those payments from AIG and others. Also, much of those fees are coming from their commodities groups who are writing the commodities index swaps to commodities index funds and then buying unlimited amounts of the futures…how else do you think oil prices are rising as demand falls and there is a huge glut in storage tanks and tankers?
Yesterday, Gary Gensler, CFTC Chairman in the first of three hearings on commodities market speculation said that over the past twelve months position limits have been exceeded by two to three times by about 70 traders! If that doesn’t answer why the commodities price of oil has no correlation to supply or demand, TB doesn’t know what does. As TB has repeatedly said it is institutional investors piling into commodities index funds beginning a year and a half ago that created this problem and rather than limit the banks from writing the commodities swaps and then buying up the underlying commodities, the NYMEX has instead stretched the position limits to accommodate the additional demand…for the futures not the underlying physical commodity!
Had the NYMEX restricted the banks, the index funds would have lagged the index and that would have curbed investment by public pension funds rather than fuel it! Somebody…and likely it will be the pension funds…will get burned badly in this and the pension funds do not need that right now…in fact they can’t stand it. In fact, in California the governator has limited the additional contribution by cities and counties to 1.5% due to the weak economy when state law allows up to a 15% increase and the unfunded liabilities are huge….we are in trouble…especially if the stock market declines.
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Barney Frank was on yesterday about the bill to limit compensation by public companies. What it would not do is have the government tell companies what to pay but what it would do is require shareholder approval. While you may scoff at this, as boards have ignored the shareholders for years even when they put up initiatives that pass solidly, this time it may be different. Citi just named three outside directors including a former Superintendent of Banks for New York (Diana Taylor), Timothy Collins, CEO of an investment manager who specializes in financial firms, and Robert L.Hoss, Dean of the Graduate School of Business at Stanford and former CEO and Managing Director of Westpac Banking Corporation Ltd. Jose was also an executive of Wells Fargo and just resigned as a director to take this spot! Doesn’t appear it will be business as usual…at Citi at least.
Also at Citi, the head of their commodities group (Phibro) is suing for them to honor a 2009 pay package of as much as $100 million! TB wonders how much of his compensation came as a result of commodities index swaps? …and at whose expense? The U.S. consumer and the global economy. Still $100 million is what it used to be…it is now more! Get real people. How much risk was he subject to personally? His job? OPM!
That’s enough for today….hope it is a good one for you!
TB
Trader Bill thinks it is clear to anyone reading these missives that they are merely commentaries…as he sees it…and do not necessarily reflect the views of anyone other than his own. Information is gathered from sources he has found reliable, but no guarantees of accuracy are implied. These are merely observations of events in the marketplace offering in an attempt to offer a non-mainstream viewpoint. Hope you find it useful. Copyright TBD Capital LLC, © July 29, 2009.
