Five Things You Need to Know: The Looming Surprise Disaster of Which Everybody Already Knows -- Commercial Real Estate

By Kevin Depew  MAR 16, 2010 12:10 PM

If so many people already know about it, is it already priced in?


1. The Looming Surprise Disaster of Which Everybody Already Knows -- Commercial Real Estate

Today at lunch, try this experiment: Ask a couple of random people if they've heard about this looming commercial real estate disaster. Then, ask yourself this: If so many people who have no real reason to be aware of this looming commercial real estate disaster know about it, how much of it is already priced in?

Or maybe, like me, you're something of a loner; no real contact with the outside world to speak of, at least during daylight hours, so instead of asking random people questions, see how much of this Commercial Real Estate reporter's template you can fill in on your own.

While _[CHOOSE FAVORITE POP CULTURE REFERENCE: Lady Gaga, Avatar, American Idol auditions]_ may still bring people out to the shopping mall, the real question is how much longer the operators of that mall can stay in business. To be sure, this isn't today's business, but beginning in _[INSERT YEAR]_ , as much as _[INSERT MASSIVE DOLLAR AMOUNT]_ in _[ADJECTIVE]_ corporate debt will come due, a surge that _[PICK ANY CREDIT MARKET ANALYST]_ says could overrun debt markets worldwide, creating a new global _[PICK A CRISIS]_.

I know what you're thinking -- is that really a template? Google search it; that same story has run in hundreds of the remaining news outlets still in business. It's not even recent -- Minyanville has been writing about commercial real estate for over a year now, though the New York Times managed to get it in today's paper and hook it up with the Mayans and Hollywood, always popular cultural reference when attached to 2012:

When the Mayans envisioned the world coming to an end in 2012 -- at least in the Hollywood telling -- they didn’t count junk bonds among the perils that would lead to worldwide disaster. Maybe they should have, because 2012 also is the beginning of a three-year period in which more than $700 billion in risky, high-yield corporate debt begins to come due, an extraordinary surge that some analysts fear could overload the debt markets.

Wait. Let's back up. Commercial real estate is in trouble. It's likely that values in the space have only fallen half of what will ultimately prove to be a massive decline. Spreads on commercial mortgage-backed securities are pointing to expectations of widespread defaults on the horizon, a scenario far more severe than the worst of the disaster in high-yield junk bonds between 2007 and 2009.

But the larger takeaway is two-fold: first, that this disaster is being priced in, and second, that this disaster is going to take place during an underlying credit bull market very much like the one that emerged between 2002 and 2007.

That takeaway is sure to be unpopular. After all, we want our deflationary depression amid a massive credit unwind and we want it now. But that's not the way it's working out. Instead, the initial unwind of the most recent credit bubble (the one, keep in mind, that emerged on the back of the widespread dot-com credit bubble crash) has merely spawned a larger and even more precarious credit bubble; one that may take a couple of years to implode, seeing as it's almost fully supported, backed, and guaranteed by sovereign states across the globe.

Like the last two credit bubbles, this one, too, will end tragically, but you'll go broke trying to time it on the equity side.

2. A reader named "RD" asks:


Thanks very much for all you columns on the DeMark indicators -- I find them very useful. Any chance you could take a look at the IYR as a lot of people are waiting for the shoe to drop on CRE of course, as it has had one heck of a rebound; I have to admit I'm salivating to short it myself...

Over and out,

RD -- Let's take a quick look at the iShares Real Estate Index Fund (IYR). On a weekly chart, we have a qualified break of a TDST Up level from August 2009. This break tells us the primary trend is positive and that we should expect a full TD Sequential sell signal countdown. A perfected sell setup 9, which is the prerequisite for a full countdown, registered in early January, but we still are only on bar 5 of a potential 13 sell signal, so it's too early to assume this up-leg has run its full course.


3. But Somebody's Gotta Take the Fall...

Some commercial real estate-related stocks with similar patterns include Simon Property Group (SPG), Boston Properties (BXP), and Federal Realty Investment Trust (FRT). Careful, though -- quite a few related companies in that group look terrible; after all, someone has to live up to the disaster we all know is coming.

4. Repo Men Versus Repo Man

I kept hearing talk and seeing an occasional clip of this new film coming out, Repo Men, but it took me some time to piece together what exactly it was about. Like I suspect of many, I just assumed it was a straight-up remake of 1984's Repo Man, Alex Cox's classic film about Otto the punk rocker (Emilio Estevez) who quits his dead-end supermarket job to repossess cars under the guidance of Harry Dean Stanton. No, no, Repo Men is far different, yet just as socionomically apropos as Repo Man was back in 1984.

Set in the "near future," Repo Men revolves around a man who has purchased a replacement organ (his heart) on credit and who's struggling to make payments on it. The kicker is that those who buy human organs on credit gotta keep those payments up -- or the organs get repossessed. The release date is this Friday. Enjoy.

5. Social Mood in Pictures

A reader named "C" sent me this photo from the airport in Louisville, KY. Looks like the advertisers, a local money management firm, have stumbled on a winning message: "Ideally situated 738 miles from Wall Street."

No positions in stocks mentioned.

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