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The next crisis is commercial real estate and maybe life insurance?

Apr 2009/in /by

The commercial real estate crisis has been looming for months and it looks as though it’s being held back by a finger in the dam.

It starts with the low mall occupancy rates. We’re already seeing store closings like Circuit City and if you walk around any but the most successful malls you’ll see closed storefronts aplenty. This trend is now flowing into the firms which own the malls, for example the current poster child General Growth.

General Growth has a mountain of debt and would, under normal circumstances, have filed for bankruptcy by now. From the Wall Street Journal: “Creditors so far have been willing to let deadlines pass because they believe there is little to be gained and much to be lost through a bankruptcy. General Growth’s mall operations are stable and many bondholders hope for a greater recovery outside of bankruptcy court.

“This is really rare,” said Kevin Starke, an analyst at CRT Capital Group LLC, a research company that tracks distressed securities. “It is corporate-bond limbo like I’ve never seen before.”

So how long can this hold out last? How long until the finger (not forcing debtors into bankruptcy) is pulled out of the dam? There is definitely a difference of opinion on whether the problem is the business of the malls themselves, or just too much debt burden – read some point, counterpoint from the UK on this here.

And worse – what will the fallout be beyond commercial real estate? We have many clients using FirstRain in the REIT (Real Estate Investment Trust) research process and as I used FirstRain to understand more about the commercial real estate market my interest was caught by the connection between life insurance and commercial real estate outlined by the Jutia Group. This Crisis is Just Starting to Hit the Headlines where the author predicts the fall:

Take MetLife for example. MetLife has $36 billion worth of direct exposure to commercial real estate… and less than $19 billion of tangible equity. A 25% drop in the value of its commercial real estate holdings would cut tangible equity in half. That would crush the stock.

MetLife isn’t alone. I’ve got my eye on 13 North American insurance companies. And all of them will take large writedowns due to commercial real estate and variable annuity exposures. At least one of them will fail over the next year.

I wish I were wrong about this. And I have nothing against any of the companies involved. Many are well run and, until now, had decent track records as good investors.

But they simply can’t get out of the way. They’re like giant hotels sitting on a sunny tropical shore… with an enormous tsunami headed straight for them.

Right now, it’s time to go short on the biggest U.S. life insurance stocks.

Definitely a trend to watch.

trend

Evidence the U.S. layoffs trend has peaked

Mar 2009/in /by

There’s a turn in the U.S. employment market happening – there’s evidence that the number of layoff announcements and reported layoff events has started to drop. This does not mean the number of job losses will drop yet since announcements precede the actual elimination of jobs, but it is a leading indicator of the turn in the employment market.

For the last few months it has seemed as if the bad news on layoff announcements just kept growing and as I watched the web news flow on U.S. Layoffs specifically – as you can do too both in the free FirstRain newsletter Eye on the Storm – or on the front page of ignite.firstrain.com – it has been like watching a train wreck every day.
But I’ve also been watching the statistics to look for a turnaround in the trend – and it’s started. There is no way to know if this is the turn or a turn in the trend but it is a compelling change in the data and could be a leading indicator of a change in the way companies are dealing with the crisis.

The data shows that the number of layoff announcements and reported events climbed through to the end of November – dropped back for the holidays – and then went back into a steep climb with the worst week being the week following the inauguration. This is because between October and January companies realized things were getting very bad very quickly and many acted decisively to manage their businesses in the face of the economic crisis. The report published by Watson Wyatt last week also corroborates that companies have made the sweeping deep cuts and the majority are now focusing are local management measures such as salary freezes and cutting 401(k) contributions to further manage costs.Note: The FirstRain data is a count of unique articles on the web about a reported layoff event or the announcement of a planned or actual layoff – it’s important to count just the original stories (we use technology to do this) because stories get copied, repeated and changed as they ripple through the web.

 

Finance

FirstRain introduces Fixed Income Research

Feb 2009/in /by

We’ve expanded our coverage today to include a number of topics our customers have been requesting to help them with their fixed income investing.

There are two major new areas covered

- Municipal bonds – this includes adding research on the bonds themselves, government infrastructure plans which are critical for modeling the risk on the bonds, municipal budget activity and job and employment trends – all tagged by state so you can just see research for the states you are interested in. In addition, we already have significant real estate coverage and so we’re tying that into the real estate impact on the tax base. More later – but we’ve introduced FirstRain content widgets onto http://ignite.firstrain.com/ for the first time and you can see samples of the type of data we’re finding in the Municipal Credit Crisis box.

- Corporate debt – this includes our usual coverage of companies and markets, but now extended to include the topics that would impact the risk of the bonds and convertible securities.

The second area is a new trend for many traditional equity investors. They wouldn’t have invested in corporate debt in the past but there is a new combination of events making it compelling. We have a number of hedge fund clients who look at the volatility of the equities markets and then compare them to the relative security – and significant rates of return like 15%+ available on some converts. Given that comparison – 15% from a senior convertible note or a crap shoot investing in the stock they understandably want to get research to help them decide on the risk profile of the convert. (If you are a Cadence employee/investor the Cadence converts are good examples of this trade off).

So if you have interest in the fixed income market and what original research is coming from the web check out the new FirstRain web site or read the press release here.

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