Property Grunt

Wednesday, January 20, 2010

Double Dip

Back in December 2008 I discussed the nature of falling knives.

A blizzard of falling knives

It appears that a lot of us under the illusion that everything is honky dory. Well, we're not.

And it appears that in 2010, not much as changed.

This Is Not a Post-1980 Recession

The following is a note I received from an attorney friend of mine:

I really enjoy what you write. No doubt we're in a stock market bubble. But there seem to be signs of underlying life within my firm's client base -- transactions on the rise, money being lent, etc. What are all these people missing?

This is truly the $64 trillion question.

For substantially everyone in business today, they've been "taught" to believe that in a recession, the Federal Reserve lowers interest rates, people respond by borrowing more money, and the economy turns because of higher end demand.

That's been the case since 1980.

Unfortunately, what we're experiencing bears no resemblance to a post-1980 recession -- either in cause or consequence.

What we're dealing with is the accumulation of almost 80 years of debt-funded growth -- across the consumer, corporations, and governments.

And what I see is a complete change in attitudes toward debt. Other than sovereign governments, no one wants more debt. Even worse, people with debt are trying to get to less -- either through repayment (by those able) or default (by those unable). But looking at the data, the change in behaviors is unmistakable.

What I sense some are witnessing is the seemingly "logical" post-recession borrowing directed toward what people believe are cheap assets.

Once asset prices turn down (which has already begun to happen anew) I expect that people who are doing deals today will discover that they've done nothing more than catch a falling knife.

Recent economic history has accustomed people to believe that all recoveries are V-shaped.

This one is at best W-shaped. And the second V will easily be worse than the first one as "financial staying power" (if not simply survival) drives behavior from here.

Blindsided By Hope: Investors Need to Watch Poor Fundamentals

NEW YORK CITY-Market energy, bolstered by marginal earnings growth, has outpaced the recovery of fundamentals. As investors look to take advantage of opportunities in the market, they may be ignoring the grim reality of weak asset indicators and a still-dysfunctional financial system, said panelists at Deloitte & Touche LLP’s Distressed Assets & Debt Symposium.

"I’m surprised that the market has jumped on what could possibly be short-term earnings," said Deborah Bailey, director of governance, regulatory and risk strategies at Deloitte. "There were clearly things that were broken and they haven’t been fixed yet." Regulators are still devising rules to prevent further systemic failure, but that process has been sluggish.

Jason New, senior managing director and co-head of distressed investing for GSO Capital Partners and the Blackstone Group, suggested that the stimulus-driven recovery is masking the risks still present in the market.

But Bailey said she shudders to think what would have happened without government sponsored actions. Stopgap measures, such as TARP and TALF, certainly halted further hemorrhaging of the market, said Bailey. The capital purchase program, for instance, provided floundering banks a lifeline during the desperate days of the crash.

However, the purchase of legacy assets through PPIP, she noted, has been far less successful and cumbersome as investors slowly wind through the bureaucratic process. The difficulty of determining pricing has largely hamstrung efforts to siphon off troubled assets.

Still, the FDIC is managing to clear its stock of repossessed holdings through foreclosure auctions, which are anticipated to ramp up in the coming year. In some respects, the agency, the prime market clearing mechanism, has become an RTC-like institution for smaller banks, observed David Ying, senior managing director of corporate advisory business and co-head of the restructuring practice at Evercore Partners.

For the larger institutions, the motivation to sell just isn’t there. Precipitous value declines--down some 40% from 2007 peak levels--would translate into substantial discounts and losses on assets brought to market. However, sales activity in the past six months eclipsed the transaction volume of the prior 18 months. If this trend continues, the market will likely see an influx of deals.

But some market observers remain leery of the continued poor performance of commercial real estate. Occupancy and rental rate growth is all but nonexistent across all property types. Randy Reiff, founder of Spartan Real Estate Capital LLC pointed out that relative value has improved and people are feeding into that excitement without necessarily acknowledging the poor performance of asset classes.

"The question with commercial real estate is: 'Are people continuing to watch fundamentals or are they being blinded by the technical effect," Reiff said. "The market traded off 30 to 40 points a year ago and everyone was saying the market rallied back. But fundamentals never came back."

From what I have read and learned about the market and our economic situation, these perspectives make far more sense to me then the ones that say happy days are here again.

As I have stated in a previous entry, I had the opportunity to purchase an investment property that was a great deal but I passed it up. And I am glad that I did because my gut feeling is that there will be more opportunities out there since there will a large segment of the population seeking capital since credit is still not readily available.

Does that mean I won't be jumping in at all? Nope. I am just waiting. All the elements of a double dip seem far more likely than a V shaped recovery. Could I be bring? Perhaps, but all the evidence I am seeing that this recovery is a long time coming. So I am going to pull back and if it takes another year, who cares.