Commercial real estate is in a structural cliff-dive, currently in slow-motion but soon to gather momentum.
With all the hub-bub about the foreclosure crisis in residential real estate, commercial real estate (CRE) has fallen off the radar screen of crises. Don’t worry, it’s still careening off the cliff; the fall is just in slow motion.
No need for a fancy report to see the signs of decay in CRE. Signs of the ongoing CRE meltdown are everywhere--empty storefronts, mall shops and vacant office complexes abound.
The causes are all too familiar: lending standards went out the window, banks loaned too much, buyers paid too much, lousy deals were avidly securitized, cash flow projections entered Fantasyland and unhealthy speculation fed widespread fraud.
Since boom-and-bust cycles of overbuilding and retrenchment are endemic to commercial real estate, it’s tempting to view this as just another post-expansion trough. Since prices have already slipped a staggering 40% from the 2006 peak, those calling this the bottom of the current cycle have some history on their side.
But beneath what appears to be a standard-issue retrenchment--a glut of inventory to work through, lenders avoiding risk instead of embracing it, and so on--structural changes in the U.S. economy are changing the CRE landscape for good--and not in a positive direction.
A long-term structural decline in CRE is not just a real estate industry concern. With some $1.7 trillion in CRE loans needing to be refinanced in the next few years, a continuing decline in CRE values could push the still-fragile banking system into a new crisis and the economy back into recession as early as next year.
The extremes reached in the boom were certainly epic: investors paid $800,000 per resort hotel room and over $500 per square foot for Class A office space, numbers which no terrestrial cash flow could possibly justify. Retail centers sprouted alongside every new exurb subdivision.
By this logic, an unprecedented boom requires an equally unprecedented bust to work through the excesses in price, debt and risk. So far so good, but there is an anecdotal body of evidence which suggests that profound systemic changes are taking place in the U.S. economy which will structurally reduce the demand for commercial real estate--not for a few years, but permanently.
A bargain frenzy since the global financial crisis has led consumers to expect and accept only slashed prices.
The dire forecast, from market research company TNS director Chris Kirby, comes as bored staff in some stores are put to work cleaning, tidying and changing window displays because of a lack of customers.
At some sites, especially fashion outlets, stock is discounted by up to 70 per cent as soon as it hits shelves to attract shopper interest.
"Consumers are no longer willing to accept the first price they find. They know there’s a good chance of finding it cheaper somewhere else," Mr Kirby said. "In essence the industry is training us to become professional, if not predatory, consumers."
The caution came as a Commonwealth Bank economic index that tracks credit and debit card transaction value trends across a wide range of industries reported the weakest spending since the height of the global financial crisis in early 2008.
One retail organisation, the United Retail Federation, said the slump was at its worst in Queensland, where small retailers were struggling to move stock, even after heavily discounting items.
The bleak picture is at odds with scenes of hundreds of shoppers queuing at lay-by counters to take advantage of major toy sales.
Thousands of bargain hunters queued at Big W stores for the start of its two-week toy sale, which ended last week.
One Gold Coast shopper complained of a four-hour wait at her local Big W store, and of being hit in the ankles with shopping trolleys in the stampede.
Target will follow with its toy sale from July 22 to August 4, having already released its 72-page catalogue offering 120 half-price bargains.
But Australian Retailers Association director Russell Zimmerman said retailers generally were finding it difficult to clear stock, even at hefty discounts. "It’s tough out there and retailers are finding it harder
Retail stocks continue to hit new 52 week highs just about every day. As we noted last week, the discrepancy between the retail stocks and reality appears to be growing with every uptick. Citi recently issued a note expressing the same belief:
“The S&P 500 Consumer Discretionary sector’s Retailing industry group looks worrisome. While retailing stocks have been very powerful performers this year, up almost 2x the S&P 500’s gain year to date, there are several reasons to become concerned about the group’s potential trading trends in the next year, ranging from fundamentals, to earnings revision momentum and to valuation. Moreover, potential equity market weakness mid-year could generate meaningful near-term profit-taking as portfolio manager conviction seems shallow. Therefore, a “downgrade watch” alert from Market Weight is appropriate.”
In this morning’s Breakfast With Dave newsletter, analyst David Rosenberg talks last week’s retail sales report.
Don’t believe everything that you read, says Rosie. According to "raw data," retail sales actually FELL1.6% month-over-month in February, and you can’t just blame seasonality for this.
Breakfast With Dave: “It’s always best to look at what consumers do rather than what they think or say. They’re spending — that’s the main thing”. That goes down as the glib remark of the weekend — front page of the Investors Business Daily (Shoppers Perk Up, Lifting Retail Sales, By A Surprise 0.3%). Another pundit said pretty well the same thing in Barron’s and following the data on Friday there was an economist on CNBC who said that you never win by betting against the U.S. consumer.
What a load of you-know-what.
Let’s more closely examine that retail sales report.
First, the raw data actually showed that sales fell 1.6% MoM in February. Now it would be meaningful if February was usually a weak month for sales compared to January so that it would make perfect sense for the seasonal adjustment factor to give the raw data an upward skew. But in fact, retail sales rise over half the time in February. And while, on average, the not seasonally adjusted retail sales data are down 0.4% in each February over the past decade, the reality is that this past February was four times as bad as the norm — not to mention tied for the third worst February since 1998. Really good result, eh?
Second, here we have the greatest stimulus experience in seven decades and retail sales are still down 5% from the pre-recession peak and on a per capital basis are down 8%. Sales are actually lower today than they were in January 2006 — four years ago — even though the population has risen 4.3% over this time. And on a per capita basis, retail sales are no…
Disappointing news on the consumer front, courtesy of the latest charge-off numbers:
WSJ: The rate of charge-offs on U.S. credit cards rose more than a half-percentage point in November, snapping a two-month run of drops from an all-time high in August, and delinquencies rose for the fourth consecutive month, Moody’s Investors Service said.
Charge-offs, which are those loans a credit-card company doesn’t think it will be able to collect, were 10.6% for November, compared with 10% in October. The ratings firm also said the delinquency rate, which gives a glimpse of issuers’ potential losses and how much they may need to set aside in reserves, rose to 6.2% in November.
LA Times: As credit lines have shrunk and consumers have cut back on spending, thousands of small businesses have closed their doors over the last year. The plight of struggling firms has been aggravated by the reluctance of banks to lend money, said Brian Headd, an economist at the Small Business Administration’s office of advocacy.
California has been particularly hard hit. The latest data show small-business bankruptcies up 81% in the state for the 12 months ended Sept. 30, compared with the previous year. Filings nationwide were up 44%, according to the credit analysis firm Equifax Inc.
Shown below is a retail proxy, the Retail HLDRs Exchange Traded Fund (RTH). It’s outperformed the S&P500 on a three month basis. Yet Best Buy’s (BBY) warning today, that revenue will be driven by lower-ticket items in the fourth quarter, could mean that the pre-Christmas retail rally shown below is toast.
Note how Best Buy dropped a nasty 7% on just these decent earnings. A lot of holiday cheer is already priced-in.
In a sign that the new normal in consumer spending continues unabated, upper-income Americans’ self-reported average daily spending in stores, restaurants, gas stations, and online fell 14% in November, reverting to its relatively tight ($107 to $121) pre-October 2009 average monthly range. Middle- and lower-income consumer discretionary spending increased by 7% last month but remained in its tight 2009 average monthly range of $52 to $61. Still, consumer spending by both income groups continues to trail year-ago levels by 20%, even as those comparables have gotten easier to match — possibly dashing hopes that upscale retailers and big-ticket-item sales will do better this year.
[click on charts to enlarge]
Spending By Income Level
Spending vs. Year Ago
The hope was that the surge on Wall Street and the seeming stabilization of housing values had encouraged some upper-income consumers to abandon the 2009 spending new normal. November’s results dashed these hopes, as upper-income consumers joined their middle- and lower-income counterparts in spending 20% less than they had during the financial crisis days of 2008 and returning to the relatively tight 2009 daily spending range for this group prior to October.
Spending New Normal
The year-over-year differences have declined somewhat during recent months, but much of this closure in the 2008-2009 spending gap is a result of the easier spending comparables from last year’s financial crisis.
On a national level, the spending new normal suggests slower economic growth than otherwise might be expected in the years ahead.
While the spending "new normal" may not be good for the larger economy in the short-term, it may be seen as a strong positive for individual consumer households. Consumers, like their business and banking counterparts, would be well-served to de-leverage by spending less, saving more, reducing their use of credit, and thereby strengthening their personal balance sheets. While this may not provide the immediate-term returns to the economy of the over-leveraging of recent years, a financially stronger U.S. consumer implies only good things for the longer-term
If local media reports are accurate, shoppers have turned out in huge numbers across the country for Black Friday.
We did a survey of local news sites to gather the latest Black Frdiay news. And it looks very good for retailers.
Cincinnati, Ohio: "A long line of shoppers looking for the best priced toys for Christmas waited outside a Western Hills Toys R’ Us store on Glenway Avenue, since late Thursday night to be among the first in line. After the doors opened at 12 a.m., there were some reports that Cincinnati police had to be called to bring order to a disorderly line of shoppers. Some of them said an argument between several groups of shoppers got out of hand and forced the police to called for help…At the new Wal-Mart superstore in Fairfax on Red Bank Road, over a thousand people came early Friday morning, to be in the right line to get some of the doorbuster sales the chain was offering…Many retailers warn that they have severely cut back on what they have ordered."
Weston, Wisconsin: "The line leading to Target in Weston stretched at least three blocks as people got ready for Black Friday shopping Friday."
Framingham, Massachusetts: "Dondrae May, a manager at Best Buy’s Framingham, Mass., store, said shoppers started lining up at 4 p.m. Thursday for the 5 a.m. opening for the limited early morning specials like the $299 32-inch Dynex flat-panel TV.
He noted that crowds were larger than last year and that shoppers were filling their basket with more items than a year ago, when they were shellshocked following the ballooning of the financial meltdown. The biggest draws were laptops, TVs and GPS systems, he said."
Aurora, Illinois: "Black Friday shoppers got an early start this year, causing a 2-mile traffic back-up near Chicago Premium Outlets in Aurora…Starting about 11 p.m. Thursday, cars began lining up to get into the mall, according to Illinois State Police…The mall opened at midnight, and the heavy traffic remained for several hours, State Police said."
There is a huge and growing problem of low wages and unemployment. It is an existential crisis for millions. If millions of young Americans don't start earning more money, they can't afford to have children, or take care of them properly, and that is the end of us as a nation. Eve...
When one looks back over the past year, Health Care ETF (XLV) has been a good place to be. The above table looks at the 9 key sectors of the S&P 500, which reflects that XLV has done really well, grabbing the #1 spot over this time frame. Year-To-Date, XLV remains in the top spot as well.
Can this hot performance continue? Check out the pattern XLV has been forming the past few months
CLICK ON CHART TO ENLARGE
Over the past 90-days, XLV remains at the top spot as well, up a little over 2...
Last week we remarked how the S&P 500 finally had broken out of a multi month range… but then it did little. Usually once a stock/ETF moves out of a long range it has a pronounced move; but the S&P 500 didn’t – it barely budged. Today that move collapsed. The S&P 500 fell 1.03% and the NASDAQ 1.11%. Most pointed to some vague increase in a chance of a rate hike but this is too much tea leaving – the Federal Reserve has said everything is data dependent.
Early last week, stocks broke out, with the S&P 500 setting a new high with blue skies overhead. But then the market basically flat-lined for the rest of the week as bulls just couldn’t gather the fuel and conviction to take prices higher. In fact, the technical picture now has turned a bit defensive, at least for the short term, thus joining what has been a neutral-to-defensive tilt to our fundamentals-based Outlook rankings.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the t...
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Understanding the new normal of a business model is key to the success of any company. The managment of companies need to adapt to the changing demand, but first they must recognize what changes are taking place. Big Pharma's business model is changing rapidly, and much like the airline industry, there will be but a handful of pharma companies left at the end of this path.
Most Big Pharma companies have traditionally done everything from research and development (R&D) through to commercialisation themselves. Research was proprietary, and diseases were cherry picked on the back of academic research that was done using NIH grants. This was in the heyday of research, where multiple companies had drugs for the same target (Mevocor, Zocor, Crestor, Lipitor), and could reap the rewards on multiple scales. However, in the c...
Bitcoin, the virtual digital currency, has been called the future of banking, a dangerous fad, and almost everything in between, but we're finally about to get some solid data to help settle the debate.
On Monday, the Nasdaq (NDAQ) stock exchange said it would ...
Chris Kimble likes the idea of shorting the US dollar if it bounces higher. Phil's likes the dollar better long here. These views are not inconsistent, actually, the dollar could bounce and drop again. We'll be watching.
Phil writes: If the Fed begins to tighten OR if Greece defaults OR if China begins to fall apart OR if Japan begins to unwind, then the Dollar could move 10% higher. Without any of those things happening – you still have the Fed pursuing a relatively stronger currency policy than the rest of the G8. So, if anything, I think the pressure should be up, not down.
UNLESS that 95 line does ultimately fail (as opposed to this being bullish consolidation at the prior breakout point), then I'd prefer to sell the UUP Jan $25 puts for $0.85 and buy the Sept $24 call...
Back in December, I wrote a post on my blog where I compared the performances of various ETFs related to the oil industry. I was looking for the best possible proxy to match the moves of oil prices if you didn't want to play with futures. At the time, I concluded that for medium term trades, USO and the leveraged ETFs UCO and SCO were the most promising. Longer term, broader ETFs like OIH and XLE might make better investment if oil prices do recover to more profitable prices since ETF linked to futures like USO, UCO and SCO do suffer from decay. It also seemed that DIG and DUG could be promising if OIH could recover as it should with the price of oil, but that they don't make a good proxy for the price of oil itself.
Kim Parlee interviews Phil on Money Talk. Be sure to watch the replays if you missed the show live on Wednesday night (it was recorded on Monday). As usual, Phil provides an excellent program packed with macro analysis, important lessons and trading ideas. ~ Ilene
The replay is now available on BNN's website. For the three part series, click on the links below.
Part 1 is here (discussing the macro outlook for the markets)
Part 2 is here. (discussing our main trading strategies)
Part 3 is here. (reviewing our pick of th...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at firstname.lastname@example.org with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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