Tilson is saying what I have been saying, namely that March saw an increased number of attractive buys, but most of these are now fully priced. As a result, he is selling equities – even building up his net short positions.

Unlike bear turned bull Richard Bernstein, Tilson says that after a huge 60%+ run up which saw a trebling or quintupling of some beaten up shares like Huntsman, you need to be cautious. Invest in high quality and low beta, he says – exactly the opposite of what Bernstein is now saying.

Despite some positive earnings reports from the likes of Toll Brothers, the sector he hates the most right now is home builders because of a 2-year inventory overhang.

Below Tilson talks to Bloomberg’s Carol Massar. The video runs just over 3 minutes.

Related posts:

• Whitney Tilson of T2 Partners, a new media darling, strikes a bullish tone
• Richard Bernstein: Once a huge market bear, now a bull
• Which homebuilder will go bankrupt next?
• Bernstein: What kind of recovery are we going to get?
• Are the markets set for a pullback?

The chain of events whereby easy money leads to malinvestment that impoverishes a society is now fully manifest in the United States.  You remember Victorville, CA where new homes were being demolished because it cost more to maintain them than to demolish them? (see post here)  Well, that same phenomenon is going to be at work all across the USA because we have just witnessed one of the greatest episodes of malinvestment in the history of the world.

An article over at the Telegraph discussing this possibility has really grabbed people’s attention (137 diggs, 66 delicious bookmarks, 474 comments at last count) and seems to be everywhere.  Here is a snippet.

The government looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature.

Local politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area.

The radical experiment is the brainchild of Dan Kildee, treasurer of Genesee County, which includes Flint.

Having outlined his strategy to Barack Obama during the election campaign, Mr Kildee has now been approached by the US government and a group of charities who want him to apply what he has learnt to the rest of the country.

Mr Kildee said he will concentrate on 50 cities, identified in a recent study by the Brookings Institution, an influential Washington think-tank, as potentially needing to shrink substantially to cope with their declining fortunes.

Most are former industrial cities in the “rust belt” of America’s Mid-West and North East. They include Detroit, Philadelphia, Pittsburgh, Baltimore and Memphis.

In Detroit, shattered by the woes of the US car industry, there are already plans to split it into a collection of small urban centres separated from each other by countryside.

Now, Mish has a post over on his blog which reminds us that the median home price in Detroit is now $6,000.  Obviously what is happening in Flint right now is coming to Detroit very soon.  But, I also want to remind you of the Victorville incident and exurb overbuilding – it is not just cities.  No one wants that housing stock.  According to Google Maps, it takes 2 hours and 40 minutes to commute 81 miles from Victorville to LA in traffic.  That’s not something many people are willing to do.  And if you look on a map, you will notice that Victorville, far inland, doesn’t have many other huge cities near by either (Barstow is 34 miles away and has great outlets for those of you who like shopping).
View Larger Map

Translation: Much of the building in Victorville was malinvestment.  This is why houses are being demolished there.  You should ask yourself how did we get to a place where entire cities are shrinking via demolition (Flint), where other cities have a median home price of $6,000 (Detroit), and where other previously sleepy towns are also shrinking via demolition (Victorville).  Why is the U.S. so shattered financially that we must resort to demolition houses in order to move forward? The answer, of course, is easy money.

1. Because of the rise of deregulation, a shadow banking system forms in the United States and globally. Long-Term Capital Management, famously leveraged 100-to-1, the most famous part of the shadow banking system fails spectacularly and is bailed out.
2. The bust frightens the Fed under Alan Greenspan, which pumps liquidity into the market due to this event and the later Y2K scare.
3. We get a massive bubble in shares, especially technology and telecom stocks.
4. The bust frightens the Fed under Alan Greenspan, which, fearing deflation lowers interest rates to 1%.
5. A massive housing bubble expands with huge overbuilding of the U.S. housing stock
6. The bust frightens the Fed under Ben Bernanke, which, fearing deflation lowers interest rates to 0% and engages in both quantitative and qualitative easing.

Do you see something wrong with this picture?

Source

US cities may have to be bulldozed in order to survive – Telegraph

Related posts:

• Chinese officials warn banks about reckless lending
• More on California Housing data

FT Alphaville is reporting that Martinsa Fadesa, the bankrupt Spanish property developer, has seen the value of its drop 30% this year alone. Spain has largely slipped from view as the credit crisis has reached global dimensions. However, it bears remembering that Spain, along with the U.S., the U.K. and Ireland have been at the forefront of residential property price falls.

The real story here is the potentially criminal inflation of asset valuaions, something that plagued the American residential property market. See details in the translation below. But, first, the FT Alphaville comments:

The administrators of Martinsa-Fadesa have submitted a report that values the assets of the insolvent Spanish real-estate company at €7.34 billion, sources said.

According to reports in El Pais, the valuation of the assets is about 30% lower than the figure arrived at earlier in the year by CB Richard Ellis.

It gets worse (emphasis ours):

The administrator values Martinsa-Fadesa’s liabilities to just under 10,000 creditors at €7.156 billion, compared with the €6.3 billion declared by Martinsa Fadesa in July. The report was submitted to creditors last week and lists Martinsa-Fadesa’s assets and liabilities as well as the ranking of the creditors.

I found the original Spanish source, and translated it.  The article is quite damning as it shows lapses by auditors, appraisers, lenders and the company itself. Note the asset value inflation of 32%, which I have bolded. This story sounds as if it could easily have been written in the U.S., the U.K. or Ireland:

The report by the directors of Martinsa’s bankruptcy reveals some accounting entries that allowed the company to say that it had closed 2007 with profits despite its precarious financial situation.

But in addition, according to this document, the administrators interposed a demand “without delay” to terminate all the guarantees demanded by financial institutions which participated in the refinancing of Martinsa’s debt to ensure the recovery of other previous commitments. Some entities already renounced these guarantees when Martinsa filed for bankruptcy. In addition, the administrators will determine if the refinancing of the 4,000 million euro loan by Martinsa aggravated the situation. They want to clarify whether “the information available to members of the syndicate of banks was sufficient to know that said refinancing would not prevent bankruptcy.” More than 40 organizations took part in the loan. Among them, La Caixa, Caja Madrid and Banco Popular Savings Corporation, among others.

Lawyers and economists are warning of the possibility that a judge, at the request of administrators, may cancel operations it considers detrimental to creditors within the period of two years preceding the date of the declaration of bankruptcy, as contemplated by Article 71 of the Bankruptcy Act. They do so because they believe that certain conditions and safeguards imposed by banks (the most common, mortgaging or divesting more assets) can be detrimental to the “mass” of creditors, but also because they fear that managers will be asked to nullify payment in kind ( deliver assets to the banks in exchange for canceling credits) until the purchase by another company.

But the investigation of administrators reveals further that the value of Martinsa-Fadesa’s assets (essentially land) was inflated, according to new valuations carried out by three firms for taxation. That will require the company chaired by Fernando Martin to rewrite the accounts that informed the Commission Nacional del Mercado de Valores (CNMV). The bankruptcy report valued the assets of the firm at 7336.9 million, 32% less than what was deemed by CB Richard Ellis.

Martinsa-Fadesa did not act alone. The vertiginous accounting revaluations were based on a report of Tasamadrid, 100% subsidiary of Caja Madrid, the main creditor of the estate, even while the report contained small print caveating that the scope of the revaluation was subject to unverified assumptions provided by the company itself.

The auditor, Ernst & Young, also approved these revaluations, so that Martins-Fadesa, the subject of the largest bankruptcy in Spanish business history with a liability of about 7200 million euros, was one of the few listed real estate companies which achieved a clean audit report in 2007.

Accounting for the merger of Martins and Fadesa attributed value to the real estate acquired by the company from La Coruna such that it allowed the firm to revalue accounts by 4,617 million. This transformed the purchase of Fadesa, whose 86.5% cost 3,512 million in March 2007 – into a bargain, to the point where the company accounted for 416 million as profit on the difference between the amount paid and the real value of the assets.

And things could have been worse. Another alternative valuation by CB Richard Ellis, who, according to market sources, was not accepted by the CNMV, would have, had it been used, revalued assets by 1,900 million instead of 416. Martins maintains that it commissioned the valuation by Tasamadrid “out of prudence”.

Now, new assessments made on behalf of the legal administrators sharply lower the value of the assets of the company. Under the heading of current assets, instead of 5912.8 billion contained in the company’s accounts to September 30 last, administrators valued that inventory at 4654.6 million. The difference is due almost exclusively to “tacit subtractions in accordance with the valuations received from independent third parties and amounting to 1255 million euros,” according to the report of the judicial administration.

Administrators also warn that “the balance of the current assets for the year 2007 included costs capitalized as business costs amounting to 57,291,000 euros — expenses not capitalized under General Accepted Accounting Principles”, despite which Ernst & Young did not make any objection.

Sources
More pain in Spain: Fadesa creditors see asset values slide – FT Alphaville
Martinsa se apuntó revalorizaciones de terrenos hasta del 19.000% – El Pais

Related posts:

• Martinsa Fadesa: the largest bankruptcy in Spanish history
• Drac: Bankruptcy in Spain as housing downturn bites
• Spain begs to be at upcoming G-20, Brazil says no
• Hypo Real Estate need for 10 billion also reveals huge problems in Spain
• Spanish local governments struggling with bust

Marshall here, as Ed is busy sunning himself in the Bahamas, whilst I am stuck in snowy Denver!

It sounds as if JMP Securities has also read the California report that I discussed recently. This is the first outside source that I have seen respond to that report.

It is so ironic. I think that the blue collar areas that were the most in danger financially have been corrected, perhaps even over corrected and yet the markets are focused on other things even though, housing was always what America’s monetary and fiscal authorities were looking to cure for the financial system to stabilize.

Am I missing something or could this be what Gladwell calls his “tipping point”? Here is the key section of the report and a Bloomberg article to follow:

Separately, JMP Securities said unsold inventory in California is falling. “We surveyed and calculated the months supply for many cities around the country recently and found that all of California and a number of other cities are actually well below the national average and continuing to improve,” JMP analyst James Wilson said today in a note to investors.

California
Declining prices have lured more buyers in California cities including Stockton, San Diego, San Jose, Los Angeles and the Inland Empire area southeast of Los Angeles, Wilson said. “As California led the nation into the housing bull market in 2002 and into the bear market in 2005, so too should it lead us into stabilization and recovery,” Wilson said.

Bloomberg story here:

Homebuilders Up on Bullish Mortgage, Inventory News
2008-12-03 21:49:10.920 GMT

By Sharon L. Lynch and Bob Ivry

Dec. 3 (Bloomberg) — U.S. homebuilders including Hovnanian Enterprises Inc., Meritage Homes Corp. and Standard Pacific Corp., rose in New York after mortgage applications surged and a report said housing supply is tightening in California.

The Standard & Poor’s Supercomposite Homebuilding Index gained 9.1 percent. Hovnanian jumped 17 percent and Meritage 16 percent. Beazer Homes USA Inc., the builder that reported its eighth consecutive quarterly loss yesterday, climbed 28 percent as JMP Securities LLC raised its rating to “market perform” from “underperform.”

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan jumped a record 112 percent last week to 857.7, the highest level since March, from 404.4 the prior week, according to today’s MBA report. The group’s refinance index skyrocketed 203 percent, while the purchase index rose 38 percent.

New home sales have steadily fallen since July 2005 to an annual rate of 433,000 from a peak of 1.4 million, according to the U.S. Census Bureau. Builders nationwide have suffered both from the decline in sales and from falling prices. The median new home price dropped to $218,000 in October from a high of $262,600 in March of last year.

Red Bank, New Jersey-based Hovnanian rose 32 cents to $2.16 at 4:15 p.m. in New York Stock Exchange composite trading. Bloomfield Hills, Michigan-based Pulte Homes Inc. gained $1.32, or 13 percent, to $11.14. Scottsdale, Arizona-based Meritage climbed $1.61 to $11.49. Irvine, California-based Standard Pacific rose 9 cents, or 5.5 percent, to $1.72. Atlanta-based Beazer rose 39 cents to $1.77.

Beazer yesterday announced its fiscal fourth-quarter net loss widened on higher tax charges to $473.9 million, or $12.29 a share, from $155.2 million, or $4.03, a year earlier. Chief Executive Officer Ian McCarthy predicted a net loss for 2009.

“We distinctly heard a death knell strike that the end was near for Beazer,” homebuilding analyst Vicki Bryan of Gimme Credit LLC wrote in a note to investors today.

For Related News:
Top Bloomberg News real estate stories: TOPR <GO>
For stories on U.S. homebuilding: TNI U.S. HOM <GO>
For stories on the U.S. economy: TNI U.S. ECO <GO>

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• Manhattan Q2 Apartment Sales down 22%
• Case-Shiller shows a further decline in prices
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I have run several stories in the past about Canada’s housing bubble because I have visited a number of Canadian cities over the past few years and all of them seemed to be building like mad. Vancouver and Toronto were the worst of the lot as far as condos go. But, as the United States housing market imploded, Canadians were deep in denial about what was to come.

That is about to change as this clip from the National Post makes clear.

Holly Wood’s first hint that something was “smelling fishy” in Vancouver’s champagne-infused construction market came several weeks ago, when she discovered that the presentation centre for the city’s most glamorous project was strangely closed.

The Ritz-Carlton hotel and condos is among the richest development to begin construction in Vancouver, a $2,500-per-square foot, 58-storey ultra-luxury tower with an eye-catching 45-degree twist designed by Arthur Erickson.

But that $500-million design is currently little more than a half-completed hole in the ground – the most glittering symbol of the troubled times that have humbled real estate development in Vancouver, a city that spent the last half-decade treating new condos like an evergreen money tree.

Credit turmoil, construction costs and the threat of a recession have left several towers stranded, unfinished and searching for either new designs or new money, while some developers are now threatening to sue buyers who are walking away from huge cash deposits, unwilling to commit to condos they pre-bought.

The problems have extended from suburbia to downtown Vancouver where Ms. Wood, an agent with Re/Max Masters Realty, had sold a unit in the Ritz-Carlton, a place where “cheap” begins in seven figures. But Holborn Group, the developer had not paid her commission. Concerned that something was terribly wrong, she did something that would have been unthinkable a year ago, in the days when real-estate was still quick money and worry-free.

She marched into the office of Holborn, sat in the board room and demanded her money.

-Financial Post

I’m sure you are wondering whether she got her money. Well, read the rest of the article and find out. But, the real point of this story is that Canada is not immune. House prices there have risen far above the rate of inflation for a number of years. With Ontario in recession and the rest of Canada to follow and with the commodities boom in retreat, expect house price declines soon in previous hot markets in Ontario, BC and Alberta. You have been warned.

The only question is what the net effect will be on Canadian lenders. To date, they have been looking very good.

Related posts
Canadian housing crisis warning
Canadian housing hits the wall
Canada joins the list of housing busts
Canada’s largest province on road to recession
Canada: Boom in progress

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The United States had been living beyond its means for a very long time before the credit crisis finally hit. The truth of the matter is that U.S. monetary and fiscal policy rewarded risk-taking and leverage at the expense of prudence and saving.

The goal of government it seemed was to avoid the pain of recession and keep the economy growing at all times. Every time the U.S. economy would hit a stumbling block, the Federal Reserve would lower interest rates and flood the economy with money. Market participants learned to trust in the Greenspan Put — an understanding that they would be bailed out by Fed policy at the first signs of trouble.

This irresponsible monetary stewardship seemed to work wonders as GDP in the U.S. continued to rise year after year. Yet, large macro imbalances increased steadily year after year. Foremost among critics of U.S. monetary and fiscal policy was Stephen Roach, Morgan Stanley’s former Chief Economist and now head of Morgan Stanley Asia. He has been warning since the bust of the Tech Bubble that “global re-balancing” needed to occur, whereby the overextended U.S. consumer passed the reigns as motor of the global economy to consumers in China, India or Japan and Europe (see article).

Below are a number of charts that I have compiled which should make abundantly clear what the disequilibria were and how large they had become. Presently, this re-balancing is being forced upon us by a deep recession. It is unfortunate we could not have had the foresight to avoid the worst of things by taking corrective action earlier, particularly after the tech bubble in 2001.

History books will look on this period of U.S. history as one dominated by hubris, where fiscal and monetary policy were particularly reckless, leading the United States into a long period of decline.

Debt and savings

Housing and stocks

Related articles
The Great Unraveling – Stephen Roach, Morgan Stanley, March 2007

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In July, I made my ten predictions for the markets and global economy for the rest of the year. Some of my predictions were pretty pedestrians, and some were fairly bold. Let’s take a look and see how I’m doing.

Here’s what I originally said:

1. Oil prices will dip below $100 before year-end. Let’s face it $130-$140 oil is a real deterrent to energy consumption. After weeks of demand destruction, the price of oil is finally reflecting this fact. Moreover, with the global economy headed for recession, expect oil prices to fall sharply. This will be a great relief for consumers and a net help to GDP.
2. Inflation will fall globally. With oil prices coming down sharply, inflation will recede too. Therefore, I expect to see headline inflation in the US, the UK and the Eurozone in particular head down into the sub-4% area by year’s end, another happy turn for the economy.
3. The Fed will lower rates. With oil prices down, the Fed can give up its talk about being hawkish on inflation. We didn’t believe them anyway! When push came to shove the ECB acted and the Fed did not. With inflation sinking, the Fed can focus its policy response on the turmoil in the financial services sector.
4. A major financial institution will fail. The happy talk about the credit crisis being over is rubbish. It is now plainly obvious that writedowns have just begun in earnest. With a global recession looming, weaker financial institutions will go to the wall. A major bank will fail. My money is on a super-regional in the United States.
5. 2nd quarter GDP in the U.S. will come in above 1%. A pall of gloom has spread over North America, Europe, Japan, and ANZ. People are predicting the worst of all possible worlds for the US. However, this is not to be. The U.S. may be in serious trouble but it won’t be reflected in the Q2 GDP number to be released this week. Why? First, the GDP deflator will understate inflation. Real GDP may come in at 4-5%, suggesting a negative real number given the CPI is at 5.0%. But, the GDP deflator has not been keeping pace with the CPI. Moreover, the stimulus package has had its wanted effect in stimulating some consumer demand.
6. America will need another stimulus package. By September, it will become apparent that the U.S. economy is headed for recession. Politicians being politicians will need to forestall this with the election coming up in November. Therefore, they will vote to pass a second stimulus package. The great thing about the second package is that the year’ Federal deficit associated with it won’t be apparent until one year later.
7. The Eurozone will fall into recession. Europe looks weak. It seems ironic that a downturn that started in America will first be confirmed as recession in Europe, but the numbers point in that direction. Spain, Ireland, Germany, Denmark and Italy are all looking particularly weak. Denmark is already in recession. Ireland and Spain probably are. The whole Eurozone average will follow soon.
8. Britain will enter recession. The UK is looking as weak as Europe. And with a property bubble and high debt burdens, British shoppers are in no mood to keep on spending. The result will be recession the UK.
9. A major home builder will bust. The latest threat to house builders in the UK, Spain, the U.S. and Ireland is land prices. As a property bubble takes hold, home sales slow, followed by falling prices. However, one must ask, what is falling, the value of the physical structures or the land itself? With material costs not significantly lower, it is land prices that are falling. And house builders who have been buying up land in huge quantities in the U.S. and the UK in particular are exposed to this reality. I expect land price writedowns to step up in earnest producing a second major home builder bust after Martinsa Fadesa in Spain. Where will it be? My best guess is the U.S. or the UK.
10. Stock markets will fall. When the summer is over and people have returned to work again, preliminary readings on Q3 earnings will start to take shape. The will not be good. Warnings will increase in September and earnings will be bad in October, precipitating a global sell off in share prices. The financial services, retail, hospitality and discretionary consumer sectors will be hit hardest.

So, that is my list of ten predictions — not all bad, but certainly not all cheery. I would not describe this as a muddle -through prediction. I see a muted, but long recession gathering hold in the developed economies with financial services fragility being a determining factor in limiting the upside until the end of 2009 or 2010 at the earliest.

Let’s see how events unfold.

Let’s take them one-by-one and see what the trend should be going forward.

1. Oil Price: Here I was on the money. Despite believing in peak oil, I did feel that demand would collapse and prices along with it. Oil did fall to $100 and went much lower. Now it is trading at $88. I don’t see it dropping much more from here, but that all depends on how robust the economy is going forward. At a minimum, we’ll see a nice little inflation dividend from this.
2. Inflation: On the money, again. My call was pretty much a no-brainer given the first call I made. Inflation will continue to fall. BUT, with credit contracting the question now is about DEFLATION, rather than inflation. I expect inflation to crater from here and deflation to be a serious possibility.
3. Fed Funds Rates: The deed is done. Now, I do think the central banks are doing their best to keep this thing from going pear-shaped, but I am not a believer in liquidity from lower interest rates as the solution. Low interest rates are the problem. But, expect more of the same going forward.
4. Bank failures: Lots of them. That one was easy. — or at least so I thought. The question now is whether we will see more major bankruptcies. I am not worried about Itty Bitty Bank, but about RBS, UBS, Fifth Third and so on. I do think that a major U.S. regional will bust by the end of Q2 2009. But, with the central bankers on the case, maybe the worst is over. At least we can hope.
5. U.S. GDP: It was way over 1% in contrast to the two previous quarters — almost unbelievably so. But Q3 was a bust and it could be negative. The U.S. is clearly in recession and I expect the GDP numbers to reflect this for both Q3 and Q4.
6. Stimulus: I think we got it. The Bailout package had a lot of tax cuts and other incentives attached. I certainly see this as a stimulus package and I expect more of the same in the first quarter of 209. On the other hand, the Europeans are going to be constrained from getting crazy like the U.S. The UK, Ireland and Spain will want to do what the U.S. has done, but they are in a fiscal straight jacket and will not do so in the same measure.
7. Recession in Europe: Unfortunately, yes. Italy, France, Germany, Ireland, Spain, and the UK are not looking good. Denmark saw a reprieve last quarter, but mat fall back into recession. One reason the Euro is weak is that Europe is weak and will continue to weaken going forward.
8. Recession in Britain: Yes! That’s a foregone conclusion. The question now is how deep. I say it will be deep. But the BoE and Labour Government actions today should mitigate some of the worst of it. I am cautiously optimistic about the UK.
9. Home Builder Bust: Only one so far – WCI. Will others go bust? Maybe. The UK, Spain and the U.S. are place
   s to expect house builder problems.
10. Stock markets down: Way down! Global equity markets have gotten their clocks cleaned. It has been nasty and much worse than I expected. This has been a crash-like scenario that I did not foresee. Obviously, things unraveled rather quickly. At this juncture, all we can do is hope for the best. U.S. futures are predicting another massive selloff as I write this.

So as I see it, I am ten for ten now. Pretty good prognosticating. But, before I get giddy and start slapping myself on the back, I must admit that things are a bit more murky now. Once we see how the real economy reacts to the monetary and fiscal moves we have recently seen, we can determine how deep the global recession will be.

Look to Asia and BRIC (Brazil, Russia, India and China) to see what is going to happen next. If they have a hard landing – especially China, this will boomerang back toward the West and we will see another leg down in the Spring.

If they pull through, then we might see an economic bottom in the second half of 2009.

Related posts
Ten predictions for 2008
Revisiting my predictions for 2008

Related posts:

• Ten predictions for 2008
• Revisiting my predictions for 2008
• Europe is next
• Denmark: the latest victim of falling house prices
• Nouriel Roubini: we are in recession

In case you missed it, the financial system in the U.S. is near collapse. This weekend was unbelievable. Lehman Brothers filed for bankruptcy. The world’s largest insurer AIG is looking for the Fed to help it avoid collapse and Merrill Lynch was forced to close a deal with Bank of America to save it’s own hide.

Just another day at the office? Hardly. Dow Futures are down 350 points and the FTSE in London is already off nearly 5%. So get ready, this is going to be a very, very difficult day in the markets. Here’s the news of importance:

It all started on Monday last week. In the aftermath of the Fannie and Freddie bailout, market nerves were not calmed. Washington Mutual fired its CEO and announced it had an ominous agreement with the OTS (Office of Thrift Supervision).

Meanwhile Lehman Brothers released an early third quarter earnings report that was widely panned by analysts.

Then, it became obvious that some major losses in the Credit Default Swaps (CDS) market were in the offing due to the takeover of the GSE’s by the government. That was going to hit companies like AIG, which had a huge exposure to the CDS market.

The result was a meltdown in shares of WaMu, Lehman and AIG on Friday.

The Fed called an emergency meeting to deal with Lehman. No agreement was found and Lehman declared bankruptcy early this morning. They have assets of $500 billion

AIG dealt with three buyout shops to shore up its capital base but rejected an offer and went hat in hand to the Fed instead. They have assets of $1 trillion.

WaMu has not seemed to do anything. But rumors are swirling and they will come under great pressure this morning. Oh, and they have assets of $300 billion.

Merrill Lynch was the coup of the day. They struck a deal with Bank of America at a significant premium to both book value and the prevailing market price of their shares. Given what we are likely to see today, Merrill Lynch and its shareholders have to be very very happy. They can say, “thank you very much, John Thain.” Oh, and they have a assets of $1 trillion.

So, we’re talking about combined assets of $2.8 trillion here.

Conclusion
So, the day begins with one company gone (Lehman). Two companies under heavy selling pressure (AIG and WaMu) and one company loving life (Merrill Lynch). Who else should we watch?

All the regional financials, the home builders, and the Commercial Real Estate REITs are all going to be under heavy selling pressure.

Brace yourself!

Related posts:

• Mea Culpa: I was too bullish on the BofA-Merrill deal
• Why Lehman failed
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• Merrill – Bank of America deal

I have been so busy following the ongoing saga in financial services that I forgot to tell you about two Washington DC-area home builders in the news.

Comstock, a privately-held developer, just defaulted on almost $100 million in debt. In addition, NVR, another builder, but a publicly traded company pulled a debt offering due to market conditions.

As for Comstock, these guys are pretty big in the DC area where I live and do retail as well as residential. Is their bankruptcy a sign of a weakened residential market or of a weakened retail environment? I can’t say at this time. Further research is required. But, Big Builder Online had this to say about their default:

Unable to maintain sufficient interest reserves on $94 million in debt, beleaguered Virginia-based Comstock Homebuilding Cos. has stopped making scheduled interest or principal payments on the debt and has hired Brad Foster of FTI Consulting as an interim chief restructuring officer.

Relatively new to FTI, Foster has more than a decade’s worth of experience in real estate and home building. He served as vice president of operations for the Sarasota, Fla., division of Morrison Homes–now part of the recently merged Taylor Morrison–for more than nine years and was the corporate controller at former UDC Homes prior to that.

Ceasing those payments puts the company in default on its loan agreements, some of which have reached maturity. A company-issued statement said that if it cannot renegotiate terms with its lenders, it may have to stop making payments on its other loans. As of June 30, the company had roughly $157 million in debt outstanding.
-Big Builder Online

NVR, also a DC-area firm, is the only home builder to rise on the U.S. stock market this year. So, that tells you they are as good as it gets in the space. Nevertheless, the turmoil surrounding Frannie and the financial services has made it a bad time to offer securities to the market, leading them to pull their offering.

NVR, Inc., one of the nation’s largest homebuilding and mortgage banking companies, announced today that it is no longer pursuing its public offering of $325 million aggregate principal amount of convertible senior notes due 2038 under its shelf registration statement filed with the Securities and Exchange Commission. The company decided to cancel the offering due to market conditions.
-Market Watch

Related posts:

• More on California Housing data
• I got my answer on homebuilder bankruptcy
• Taylor Wimpey faces bankruptcy
• Which homebuilder will go bankrupt next?
• Martinsa Fadesa: Asset value drops 30%, liabilities much larger

Money Week points out the scenario for Taylor Wimpey, the UK house builder resulting from the top-of-the-market merger of Taylor Woodrow and George Wimpey, now that shareholders have rejected its rights offer:

We’ve been saying you should avoid investing in house builders for quite a while now.

It looks like the City has come around to our point of view with a vengeance.

Taylor Wimpey hasn’t been able to convince investors to give it the £500m it needs to shore up its balance sheet. The country’s biggest house builder by volume may face “collapse when covenants are tested in February,” said Dresdner Kleinwort analyst Alastair Stewart.

It was just one grim story among many from yesterday that all pointed to one thing. That Britain is facing one hell of a slump…

Taylor Wimpey shocked the market yesterday by warning that it hadn’t yet been able to raise money from investors. Its shares ended down nearly 42% as it said it could breach its covenants by February if cash isn’t forthcoming. The company is shutting down a third of its regional offices, cutting 900 jobs. It won’t be paying a first-half dividend.

But it’s also set to write down its land bank by £550m (that’s 11%), and it’s carrying £1.7bn in net debt. As the company delicately put it, if it can’t sort out the terms of its banking facilities: “in certain negative market scenarios we might breach one or more banking covenants at the first testing date in 2009.”

It’s hard to believe that the market will be positive enough to save Taylor Wimpey by then. Reservation levels are down 45% in the 26 weeks to June 26, compared to the same time last year; completions down by a third. No one is buying houses anymore. The group is also exposed to the U.S. and Spain. It’s hard to imagine a worse group of countries to be building in at the moment.

That doesn’t mean the company won’t be able to find a solution given time. The banks won’t be keen to shut down house builders, given their own hefty exposure to the sector. But these problems are by no means exclusive to Taylor Wimpey, although it is one of the most vulnerable.
-How bad will the recession get?, Money Week, 3 Jul 2008

This is the frightening scenario that many banks will soon face. Without additional funds many of these institutions would be effectively bankrupt.

Investors are getting tired of throwing their money down a rat hole as the credit crisis reveals these organizations to have badly misspent shareholder funds. The day of reckoning is coming for banks, house builders, brokers, the whole lot.

As Barclays’ fundraising shows, banks still have many options available. So that day of reckoning is nearer but it isn’t here yet. Question: what will it take?

Related posts:

• UK housing starts hit a post-war low
• The UK is even gloomier than the US
• Nationwide: UK house prices down 10.5%
• Mortgage meldown in Britain
• I got my answer on homebuilder bankruptcy

Mike Morgan is a Florida real estate professional with years of experience. He is often featured on Mike Shedlock’s site with his commentary of Florida real estate as ground zero in the housing bubble. He writes about his basic premise that we have been in the eye of the storm, but that there is more storm to come. I saw his article in Barron’s when it came out but it is now publicly available on Mike Morgan’s site. Now might be an opportune point to re-visit his themes.

In the Eye of the Housing Hurricane
Here’s a lesson many Floridians have learned the hard way: All hurricanes have three parts—the front half, the eye and the back half. The eye is a deceiving quiet period at the center of the hurricane. The eye lulls you into believing the storm has passed and all is well.

In fact, the back half of a hurricane can be far more devastating than the front half. The front half of a hurricane does a lot of damage and weakens many structures. Then, when the back half hits, houses, buildings and personal property teetering on the brink of failure are utterly destroyed. Moreover, since the wind is coming from the opposite direction, anything strong enough to resist the first half is tested again by the back half.

This is exactly what’s happening in Florida’s housing and financial markets. We are in the eye of the hurricane, and the back half will hit us twice as hard as the front.

The front half of the Florida real-estate hurricane was fed by a bidding frenzy that drove prices to a peak far above real demand: Flippers were not buying homes for function, just for trading. And with the Fed’s free-money policy, flippers were leveraging themselves at the same 30-to-1 and 50-to-1 levels as the financial wizards on Wall Street.

This artificial demand created an inflated supply of homes. By 2006, the inventory of unsold real estate reached a crisis level (“Florida’s Housing Hurricane,” Other Voices, Oct. 2, 2006 – Click Here). The combination of rising inventory and prices, which had no relation to demand for housing that people wanted to live in, fed the front side of the hurricane.

Recently, however, there has been a lull in the windstorm. Would-be buyers are returning to the market. Over the past few weeks, we’ve been seeing 300% increases in traffic at our open houses from a year ago. Builders and real-estate agents report that offers are up, along with traffic.

But this is not the end of the hurricane; it’s still the eye. What the builders and agents neglect to report is that most of the traffic couldn’t qualify to buy a moped. Nor do they report rising rates of pending contracts that fail to close. And they don’t mention the damage being done by falling prices, which put more and more homeowners into negative-equity positions and make it more likely that more property gets pushed back to the lenders.

Nor do the builders dare to mention the bulk sales of inventory homes they are making to a new generation of giddy flippers with deeper pockets. This nonsense not only forces prices down further; it also creates a new competitor for the builders’ remaining inventories. The bulk buyers still have to sell these homes to end-users.

This twist is not all that new, but it is continuing to feed the overall problem of inventory glut. However, this is not what we should be focusing on as we enter the back half of this hurricane.

Almost nobody is reporting on how the inventory problem of 2006 has moved from builders to lenders, and how the lenders have no clue about what to do with the surge of defaults and foreclosures.

The reason the back half of the hurricane will be such a devastating wipeout: The failure of the lenders to address their issues with defaults is compounding the inventory problem to the point where we will see a tidal wave of inventory hit the market.

As a real-estate broker in Florida, I have first-hand experience with homeowners defaulting on mortgages and lenders who appear to be far too confused to develop a clear plan for avoiding foreclosure auctions.

Buyers now realize lenders are going to take weeks or months to review and respond to offers that often reflect market value but fall short of covering the balance on the mortgage. Such “short sales” should be the easiest way for lenders to move inventory at market prices—but the lenders have not faced reality. And now, most buyers who have had experience with short sales no longer want to look at short-sale properties because of the long and convoluted process. Instead of using this tool to realize market values, the lenders are dumping property into below-market foreclosure auctions, which then creates another new downward spiral for prices.

Lenders’ failure to address these issues has forced more defaults, which lead to skyrocketing foreclosure rates. Defaults and foreclosures mean huge expenses for the lender, and significantly lower values. And it gets worse for lenders. In the most extreme examples, lenders cannot foreclose because the documents have not followed the mortgage.

Lenders may be telling Wall Street and Capitol Hill that they are developing plans to keep owners in their homes, but we are seeing the exact opposite in the world of reality. Even when we try to work with lenders, most of the time there is no one at the helm with the authority to process a cup of coffee, let alone the sale of a property in default. The easy answer is to simply let the property flow through to the foreclosure auction, even when that means 30% to 50% less in sale price.

Commercial and retail property are also becoming casualties in the back half of the hurricane. Drive through just about any Florida market to see all the For Lease signs on commercial property. Real-estate agents, lawyers, builders, contractors, mortgage brokers, insurance companies, furniture stores and all the rest are going out of business and leaving a flood of office and commercial inventory vacant.

The condo market? Do you really want to hear anything about the devastation that the lenders and local municipalities are facing over the collapse of the condo market? That’s like adding a Class 5 tornado to the Category 5 hurricane over Florida.

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MIKE MORGAN is a real-estate broker in Stuart, Fla. and owner of Morgan Florida, which offers residential, commercial and investment real-estate services and research.

Related posts:

• Commercial Real Estate bust
• Commercial property hits the front page
• Why Real Estate Market Is Nowhere Near a Bottom: Caroline Baum
• Looking for a bottom in Manhattan real estate
• Commercial real estate is next

According to the Telegraph, UK housing starts hit their lowest level in 63 years. With a lack of new business, how will Barrat’s and Taylor Wimpey survive? The Telegraph suggests that investors will save them, much as they have saved the banks who are also in need of capital.

“Housebuilders’ share prices surged by up to 13pc yesterday despite predictions from experts that activity in the sector is set to fall to the lowest level since the end of the Second World War.

The market was boosted by a report in The Sunday Telegraph outlining a rescue package for indebted housebuilders being proposed by investment bank UBS.

The bank is understood to be drawing up plans that would see major institutions inject fresh capital into the struggling companies instead of relying on a rights issue.”
-The Telegraph, 17 Jun 2008

hmmm…

Related posts:

• UK house prices fall most in 15 years
• UK home repossessions have soared
• The UK is even gloomier than the US
• Subprime housing bubble timeline
• Canada’s housing market is coming unstuck

On Monday, I asked, “which homebuilder will go bankrupt next?” The answer came on the very next day: Legend Homes, an Oregon-based homebuilder. The Oregonian newspaper reports:

“Legend Homes, one of Oregon’s largest home builders, filed Chapter 11 bankruptcy today after its parent company made three ill-timed land investments in once hot housing markets.

David Oringdulph, Legend’s chief executive officer, said land purchases he made in Vancouver, Riverside, Calif., and Bend prompted the bankruptcy. The company sought land to expand its home building during the recent boom.

But when the market cooled, the projects stopped and the company got stuck holding land worth — in some cases — less than they owed on the property.

In the bankruptcy, the Tualatin-based company reported assets and liabilities between $100 million and $500 million. KeyBank is the largest creditor with a $22 million claim.”
-OregonLive.com, 10 Jun 2008

So it is.

Related posts:

• Expect bankruptcy in the record Stuyvesant Town real estate deal
• Drac: Bankruptcy in Spain as housing downturn bites
• Builder News: Comstock defaults, NVR pulls offering
• Which homebuilder will go bankrupt next?
• CRE: GMAC-related Capmark Financial near bankruptcy

When was the last time you heard of a major U.S. home builder going bankrupt? It’s been quite a while. Even though my focus right now is firmly fixed on financial institutions and mortgage lenders, I have a watchful eye on home builders. After all, I believe that the next leg down in the housing bubble involves some mix of regional and local banks and construction loans. That puts home builders front and center.

The following is a short list of home builders and their tickers on Google Finance. If one wants to make predictions, home builders with significant exposure to bubble markets like Phoenix, Miami, San Diego, San Francisco, and Las Vegas are prime candidates to fold.

One interesting company in this list is WCI Communities, a one-time high-flier with significant exposure to South Florida. Last year, Carl Icahn tried to force his way into control of the company, making a tender offer before the credit crunch hit for $22 a share, a 16% premium. The Board was able to resist Icahn’s challenge only to succumb to the market. WCI now trades for $1.73 a share and has been rumored to be on the verge of bankruptcy.

BZH Beazer Homes USA, Inc.
CTX Centex Corporation
DHI D.R. Horton, Inc.
HOV Hovnanian Enterprises, Inc.
KBH KB Home
LEN Lennar Corporation
MDC M.D.C. Holdings, Inc.
NOVS NovaStar Financial Inc.
NVR NVR, Inc.
PHM Pulte Homes, Inc.
RYL The Ryland Group, Inc.
TOL Toll Brothers, Inc.
WCI Communities, Inc.

Sources
Planned tender offer lifts WCI’s shares, MarketWatch, 13 Mar 2007
WCI Rebuffs Icahn Buyout Bid, TheStreet.com, 05 Apr 2007

Related posts:

• I got my answer on homebuilder bankruptcy
• More on California Housing data
• New home sales and durable goods: economic reports
• Builder News: Comstock defaults, NVR pulls offering
• Taylor Wimpey faces bankruptcy