A Ground Zero look at how real estate, housing
and credit issues are impacting global markets from Mike Morgan, J.D., RIA
- providing services to portfolio managers, REITs, builders, pension
funds, analysts and high net worth individuals. Here you will find reality
and a perspective that most Wall Street analysts and reporters don't see,
see too late or don't want to see. For additional information, comments
and research visit www.Morgan-Florida.org
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Sunday, August 3, 2008
The
World's Grandest Ponzi Scheme Unravels
Pathetic Piping Puppets - When I see some of today's
financial "experts" telling us why there was a housing meltdown
and why there was a mortgage crisis and why we now see the financial
system crumbling . . . I find myself yelling at the TV, eventually
launching the clicker at the screen. It's an expensive habit, but I don't
yell as much at the guys like Mozilla, Paulson, Greenspan, Schwartz or any
of the other guys that ran the Ponzi scheme. No, those guys were bad, but
not nearly as bad as the ABC, CBS, NBC, FOX, CNN and CNBC financial
experts who had the ability to do something, because today it is all about
media. Instead, the clowns like Cramer, Kudlow, Glen Beck, Wolf Blitzer
and even sweet Miss Becky and innocent Erin continued to fuel the fire.
Instead of reporting on what was happening under the dirty sheets, they
only reported on the "happy times" as they all bellied up to the
bar and fed like pigs.
To Catch A Predator - Just think about it . . . MSNBC Dateline
ran child molester stings until we cried Uncle. What would have happened
if they did the same about the financial crisis. If they had done that,
they would have all lost their jobs, because Paulson's fraternity of
Goldman Sachs brothers would have eviscerated the advertising of the media
through strong-arm tactics on their clients. Why was it OK to run To Catch
A Predator until we puked? Because the sexual predators were not buying
air time. Do you realize, Dateline would not even have had to change the
name of the show. They could have just changed the format from sexual
predators to Wall Street's financial predators. If they want to call it
like it is, start calling it where it hurts. By the way, the answer to the
most frequently asked questions I receive is, Yes. I do wear a bullet
proof Kevlar vest. I hired another body guard last week. And I never sleep
in the same place twice.
With that out of the way, let me ask the question no one wants to ask.
What in the world were our politicians and attorneys general doing? Well,
they all knew what was going on, including Senator Bunning. And they were
the only ones that could have really stopped it, but they were too busy
dining and dancing with Paulson's frat boys here and abroad on lavish
junkets. I'm going to get emails about that, but luckily I have an
enlarged fluorescent orange delete key.
The BOSS Speaks - If you really want to laugh and cry at the same
time, you must listen to Greenspan. Now he's telling us "this was an
accident waiting to happen." Hold on a minute. He was the guy with
the keys. He was the guy with the car and the money to put the gas in the
car. He also wrote the rules on how to drive the car. And . . . he waived
all restrictions on who could drive the car. The Greenspan rules state . .
. and I read them again a few minutes ago to confirm: Drivers Include -
Anybody, Everybody, Somebody and Nobody . . . but not me.
This week Greenspan told us we crashed. The car is a total wreck and the
only survivors are on life support . . . with severe brain and limb
damage. The question still remains, who was driving. Was it Nobody or
Everybody? Or was it just Anybody? Maybe it was Somebody, but we know it
wasn't Greenspan. Or at least that's what he says now.
The Cleaner - Just like all gangster movies have cleaners
to get rid of the dead bodies, we have Paulson. Think about that. We had a
typical "old time" gangster boss (Greenspan) totally out of
touch with reality, but surrounded by "yes-men" sucking off the
money created by his directives. Kind of like the generation of gangsters
that moved from a no-drug policy, into cocaine and heroin at the urging of
his young lieutenants (Paulson, Steele, Schwartz, Rubin, et al). The old
bosses were clueless, and it all ended in collapsed gangster families,
bloodshed and now chaos. So now we bring in The Cleaner, Paulson. And he
immediately calls in one of his lieutenants, Wilson. These are the guys
that belonged to the global fraternity that created and executed the Ponzi
scheme. As for the "bail-out." It's restricted to friends and
family. There is no bail-out for the public or for
the pension funds that bought into the Ponzi scheme. But I
am not going to re-hash it all. I've written about it long enough, and I
took a lot of heat in my professional career and my personal life. You can
read much of what I have written on my blog and institutional website.
Let's talk about what is happening now . . .
Depression - Totally
unavoidable. Bank on it. Well . . . you won't be able to
bank on it, but you can bet on it. We are not only headed for a
Depression, but a violent Depression that will be far worse than 1929.
Some experts believe the United States will fall into the chaos, bedlam
and anarchy that tore apart Yugoslovia. I am not going that far, but I
know our morals and ethics are not the same as they were in 1929.
Moreover, we are a far more violent society and totally dependent upon a
well oiled system for delivery of food and basic services.
Bank Failures - I warned that Fridays would become known
as F3 - FDIC Failure Fridays. And Voilá . . . two bank failures on
Friday, July 25. Then another bank failure a week later, after the market
closed, on August 1. Next week? Maybe none, but maybe 10 . . . or more.
And here's why.
I am on the ground, in the trenches, and behind enemy lines. To repeat for
those new to my information, I own a real estate brokerage in Florida and
I serve as a consultant to banks, financial institutions, mutual funds and
hedge fund managers . . . as well as builders and developers. So when I
talk, I talk from Behind Enemy Lines....................................................
I can tell you this. We will see at least 100 bank failures
before the end of the year. What's important about that statement,
is it is not another rear-view mirror statement from one of the financial
experts on TV or some of the others that write blogs and columns . . . but
never venture out into the world of reality. I will share what I am seeing
on the ground and hearing from my institutional clients here and abroad.
US Banks - I work with banks on two levels. One, we offer
services to banks selling foreclosed properties to consumers. Two, we
offer services to banks trying to determine what they own, what it's worth
and what to do with it. The latter includes evaluating portfolios for bulk
sales and trying to coordinate these transactions. Let me start with the
first level of services.
Banks and lenders that are foreclosing on properties have managed to
bumble the process of disposing of foreclosed properties. Then again, as I
have noted many times, banks are not in the real estate business, and I
warned that they would be the group to drive prices into the ground, finally
collapsing the entire system. That is exactly what is happening.
The systems developed by banks and lenders are horribly convoluted or they
have farmed the process out to asset managers that often are
"totally" incompetent. I thought we might see this start to
correct itself, but it is actually getting worse . . . and now banks and
lenders are the ones throwing jet fuel on the fire. For my residential
brokerage, we have reached the point where we must carefully evaluate
whether we even want to take these listings. You heard it right.
Most brokers would kill for listings of foreclosed properties. These
properties are often priced below the market so they can sell fast, but
that is rare. Most of these properties come with a laundry list of
headaches and expenses. And when they do sell, the asset managers are
skimming a full third of the commission off for themselves.
Real estate agents still vie for these listings, because we have an
industry that is not regulated, with a low barrier of entry, and 98% of
our industry is part-time. Agents don't understand what is involved with
the sale of foreclosure properties, and lenders don't take the time to
develop procedures to avoid incompetent real estate agents . . . just as
the lenders ignored the issues with mortgage brokers during the
development of this crisis.
I will shed a little light on this for those not in the industry. Foreclosure
listings come with a laundry list of Things To Do. This begins with
occupancy reports and rekeying of the property, that can quickly escalate
into initiating the eviction process if there is an owner or tenant in the
property. And once you gain possession, there is the trash-out, clean-up
and repairs. This process alone can take several weeks and cost the
agent thousand of dollars. Listing agents must pay for all of these
expenses, as well as place utilities in their own name. Even after getting
over these hurdles, which on average takes a month, the property then must
be priced. That process can take 2-3 weeks, and it is so riddled with
inefficiencies that most properties are overpriced because of the time it
takes to complete this process, and the level of competence of those
providing the Broker Price Opinions.
100% Loss = Busted Banks - To get to the stage where we have a
price on a listing, the lender has already spent tens of thousand of
dollars. Here's a basic example for a $400,000 mortgage. The property is
most likely only worth $250,000 now. I have previously written about the
process and expense involved in property disposition, so I will cut to the
chase. A lender will be lucky to clear $125,000 on this property. This is
not a typical example. The typical example is a $250,000 mortgage where
the property is now worth less than $150,000 and by the time you carve out
all the expenses . . . the bank has a zero or negative. The reason for
the zero on the lower priced property, is because many of the expenses
(i.e. foreclosure process) are the same for a million dollar property as
they are for a $100,000 property. So here is the question for Paulson,
Bernanke and Bair. How can any of our banks survive when they are
taking 70% -100%+ hits on mortgages? PB&B will tell you these
problem mortgages make up less than 2% of total mortgages. Huh? What? I've
got news for them. I have no idea where they are getting their numbers,
but you don't even have to go behind enemy lines to see through the
numbers they are trying to feed us. Drive around and count For Sale signs.
Now multiply that by a factor of 2-10 depending upon where you live and
whether signs are allowed in all neighborhoods. Now double that number for
the homes that are moving into the foreclosure process, and then double it
again because things are getting worse (quicker), not better.
Admitting Defeat - The lenders I speak with know they are dead.
They have no problem admitting it now. They realize their jobs are
over, and they are on borrowed time. They are nothing more than
liquidators now, and they are doing a lousy job at it.
We built too many homes and have too many builders. The markets are
correcting that. We have too many mortgages and too many mortgage brokers.
The markets are correcting that. And we have too many banks. The
markets are correcting that as well. Paulson's tinkering with the ability
to short his Fav19 will come back to mark him in history. It was
un-American. This is not Russia or Venezuela. If the markets were not
working because of naked shorting, then put the bastards in jail that were
violating the rules. Unfortunately, that would mean Paulson was going to
have to throw his frat boys in jail. Paulson knew what he was doing with
the Fav19, just as he did with the Housing Bill. Paulson had one purpose,
and one purpose only in both the Fav19 and the Housing Bill . . . to
bail-out his buddies. That's it. Full Stop.
The Housing Bill is a complete, absolute and autarchic ploy by a man that
has far too much power and control. I am not going to write about the
Housing Bill. I am going to save that for our August 7th Conference Call.
If you are interested in the Conference Call you can purchase a dial in
code - Mike@MorganFlorida.org
Clients receive free access codes and will receive the replay link.
I'm going to share some things that I am doing in my model portfolios as
well as some of the trading we are doing in our trading portfolios, but
you will find sections below that are only a portion of what I wrote, and
the portion not visible publicly (about half of the meat) is what my
clients are receiving. There are sections below where I refer to
"more info for clients," and this simply means you are only
seeing a portion of what I wrote. The balance is reserved for clients only.......................................................
The really cool part about all of this for short traders, is that most
of the banks still have no clue what they own, what it's worth or how much
trouble they are in. Personally, I've got to think most of these
big banks are broken and broke. As Greenspan said, it is not a liquidity
problem, it is a solvency problem. B-I-N-G-O...................................
Back to the Banks - I will reserve most of this for
clients, but let me share a little of what I am seeing over the last few
weeks. Make that 2-3 weeks. Fear is clearly in the air, along with
desperation and a huge dose of stupidity. I often use the term banks,
financials and lenders interchangeably. I'm not going to apologize for it,
but I will try to explain it. Some of these players are involved in all
three areas. Some are hybrids. BOA is a bank. It is a financial. It is a
lender. And I am seeing the fear at all levels.
At the street level, we see more properties coming to market. As this
unravels, the process grinds itself into dysfunction. Are there any smart
banks left? Easy answer, but I am going to reserve that for my clients. I
will share one more point with you. The dysfunction of the disposition
of the foreclosure properties is just the tip of the iceberg. It is
enough to sink the banks, but you must consider what banks do. They
loan money. I have news for you, they are not loaning money, so as I have
said for far too long, the problems simply feed on themselves now. If you
are a butcher and you are not selling meat, you are not a butcher. If you
are a bank and you are not loaning money, you are not a bank. You may
think you are a butcher or a bank, but you're not.............................................
The lawsuits racing at the institutions from attorneys general .
. . and very soon, coming to a theater near you, are some huge lawsuits
from the private-sharks representing pension funds and other fiduciary
accounts mismanaged by the fraternity boys and girls. Attorney General
Cuomo has already made it quite clear that he is just getting started................................
Housing Prices - Let me touch on this briefly. Prices
are going to drop another 20-50% without a Depression. As we move into
Depression, it will be an event we have never experienced at the scale
we are entering. Much, much, much more info and color on housing
prices and specific markets for clients, as this is critical to our
decisions on the builders . . ............................................
A House for Everyone - Very quickly on this one. I was
always afraid to use the word Depression, because it sounded crazy. Now
it's reality. One thing that bugged me over the last year was the level of
inventory and the NAR numbers. Nothing seemed to add up, but I kept this
to myself. I believe we have more homes (apartments and single family)
than we have people to live in them....................................................
Traditional banks can't make loans because they don't have any money
to loan, and they are too busy foreclosing on millions of mortgages they
have on the books that are sour. The few banks that are still issuing
mortgages are few and far between. Moreover, the hoops the buyer must jump
through are just about insurmountable...........................................
Asset Protection - It has become next to impossible
to open a "reliable" Swiss bank account to hold foreign
currency or gold. Even the banks we were working with have refused to
discuss new accounts from the United States........................
Pawning for Potatoes - I have a few clients and
readers are in the pawn shop and/or jewelry business. There emails are
great - Behind Enemy Lines - information. Let me share a few with you,
because people are now selling what's left just to put a meal on the
table:
1 - 3/4 kt round diamond ring, vs1, color G, 14kt gold setting with 8
diamonds.....lady needed $200 because her water got shut off
2 - I had a guy come in with his wife. She was crying because they were
selling her engagement ring. It was all they had left. He walked out
crying and I wanted to shut the shop down for the day. Its getting gut
wrenching.
3 - The BMW 7 Series people are showing up with goods.
4 - Today a financial planner with sterling candlesticks. This is crazy.
5 - This week we had our busiest week in the history of our company. All
three locations. My cousin in California has six shops and he has doubled
the size of his staff since the first of the year. Where does it end.
6 - The people coming in lately are not what we saw a year ago. I have to
say more than half of my business is white collar and when you consider
dollar value it is 80% or more. You have been right on the money Mike.
7 - July was a record month and a very tough month emotionally. I have
been doing this for 30 years. I never seen so many people coming in just
to pay for food. What do they do next?
Bye Bye Benigans - Cracker Barrel Next? - There are two
points to this treat. Yes, it is a treat for those of us short the REITs.
Benigans filed Chapter 7 this week, which means they shut the doors and
walked away. That means 150 company owned store vacancies for REITs
and similar owners throughout the country, with the potential of 138
additional vacancies when the franchisees shut down. While Benigans is not
that big a hit to the REITs, the future of Linens 'n Things 600 stores
is still up in the air with their Chapter 11 filing. I'm betting on
Linens 'n
Things not making it. It is poorly run through Leon Black's Apollo Global
Management. Our field research tells us the winner is Bed Bath and Beyond,
and Linens 'n Things closes the doors once GE and other creditors put the
squeeze on Black's huge miss with Linens 'n Things. Unfortunately, there
is no way to play the Linens 'n Things failure against the success of Bed
Bath and Beyond, as we did with Office Depot and Staples.
Speaking of successful paired trades, this was the best. Moreover, we
believe Office Depot will be closing stores this coming quarter........................................................
Supermarkets Hurting Too - This was by far my favorite
field research. Whenever ice cream is involved, it is good. The other day
the GreenPaulKenites (GPKs) really had me down, so I decided I needed an
ice cream fix. As I was checking out in the supermarket, with several
pints of Hagen Daz, the gal packing my treats made a comment about her
vacation next week. She sounded about as down as I felt, so I said,
"I sure could use a vacation." Her response was, "Not
me. I'm broke." My brain kicked into field research mode and I
started asking her a few questions. There was no one in back of me, so I
took my time and the young lady checking me out also chimed in. Here's the
scoop. Seems like this unnamed supermarket chain is forcing employees
to take vacations. As the ladies eloquently put it, they were being laid
off. Why? Business is off. Did you hear that? Business is off in a
supermarket selling food and water!
That started me thinking so I took it to another level, considering the
effects of gas prices and combining trips to the supermarket, as well as
what was going on at BJs, Sam's, Costco and Wal-Mart................................................
Mervyn's Moving Out - Maybe? Most likely, yes. But for
now they're going to do the drag it routine so the boys at the top can
keep sucking out the dollars. Mervyn's filed Chapter 11 this week with
176 stores. And that's just the beginning for the retail sector..........................................................
Ann Taylor closing 117 stores
Eddie Bauer to close more stores Cache - closing 20 to 23 stores
this year
Lane Bryant, Fashion Bug, Catherines closing 150 stores
Gap Inc. closing 85 stores
Foot Locker to close 140 stores
Zales, Piercing Pagoda plans to close 105 stores
Home Depot closing 15 stores
Macy's - 9 stores closed
Movie Gallery – plans to close 400 stores
Hollywood Video closed 500+ locations
Pacific Sunwear - 153 Demo stores closing
Pep Boys - 33 stores of auto parts supplier closing
Sprint Nextel - 125 retail locations
Wilsons the Leather Experts – closing 158 stores
Bombay Company - closing ALL 384 stores
KB Toys closing 356 stores
Dillard's Inc. will close another six stores this year.
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