April 24, 2009

1) The big listed REIT's are grasping for a life raft, a life preserver, or a flotation device of any description they can get their hands on. Even Pamela Anderson will do! They have used this month's ferocious short covering rally to engage in some prodigious equity fund raising, nearly $4 billion in total. Only companies drowning in debt would be raising equity at these subterranean prices. Prologis (PLD) lifted $1.15 billion, followed by Chimera (CIM) $810 million, Kimco Realty (KIM) $747 million, Vornado (VNO) $645 million, and AMB Property (AMB) $576 million. I guess management isn't sleeping too well at night. Existing shareholders are being diluted up to the gills. But half an asset is better than nothing. Many bought commercial properties with cap rates as low as 3% at the top of the market, betting that rents inflated by an endless retail boom would drag them up to 7-8% over time. The opposite happened, and some properties now have negative yields in extreme cases, with massive debt, and irate tenants pounding on the table demanding lower lease rates. Bankers are taking their pound of flesh, rolling over short term debt with only the most draconian terms, merrily widening spreads, adding covenants, and chopping loans to value along the way. I wonder if this orgy of recapitalization is simply an effort to bail water out of a sinking craft, or a battening down of the hatches for the tidal wave that is about to hit them. Women and children first!

2) Interesting tidbit of the day. The number of people changing residence is at the lowest level since 1962. Unemployed are unable to move to healthier job markets because they can't sell houses that have negative equity. These conditions are playing hell with multinationals unable to move personnel around the world, or even within the country. A lucky few are renting out homes at a negative carry, and passing the bill to their companies as a cost of doing business. I have to admit that I was caught in this trap when Morgan Stanley (MS) transferred me from New York to London in 1984. The city was still recovering from its flirtation with bankruptcy, crime rates were sky high, and interest rates were backing off from an 18% peak. The market was dead. Fortunately, the firm took me out of my co-op at a decent profit, sat on the property for a year, and then sold it for a $100,000 hit, knowing I could make the money back for them with the right phone call. That was back when the firm was still private,?? had a Rolls Royce, cradle to grave benefits plan, and went to incredible lengths to keep key revenue producers happy. I wouldn't want to try that now.

3)?? Highlighting my bullish positions on the soft commodities is soybean's 20 cent push yesterday to $10.65/bushel, a six month high. Massive Chinese buying was again the culprit, with the Middle Kingdom lifting 404,000 tonnes from the US in the latest report. There is a real risk that American stockpiles will drop below 100,000 bushels by the summer, creating domestic shortages and bringing a return of the food inflation we saw last year. Better buy that tofu dinner now! Poor weather is expected to shrink the domestic Chinese grain crop this year by 8 million tonnes to 220 million tonnes, and there is little option for them, but to accelerate imports. In the meantime, the Buenos Aires Cereal Exchange has cut its forecast of that country's production by 19.9% to 37 million tonnes YOY. More demand and shrinking supplies can only mean one thing for prices, and the charts look very positive. Several big hedge funds have jumped in with long positions, boosting the open interest in the futures market. Never bet against a big trader that can eat their long positions. Pray for rain, my Argentina.

QUOTE OF THE DAY

'When you have a 100 year storm, all correlations go to one,' said Carter Worth, chief technical analyst at Oppenheimer Asset Management.