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November 17, 2009

Back to the Homebuilders vs. the Banks
by Reggie Middleton

In 2007 I put out a lot of research and opinion on the home builders and attempted to portray them in a light that the sell side analyst community and apparently the buy side investors failed to notice. See

Voodoo, Zombies, Lennar's Off Balance Sheet Accounting and Other Things of Mystery & Myth (I believe this was the first time anyone ever called the homebuilders on their off balance sheet debt through unconsolidated JVs),
Lennar Insolvent: Enron redux??? Lennar, Voodoo & the Year of the Living Dead!
Now, a "Realistic" View of Lennar's Solvency
Bubble, Banks and Builders - Pt III: Do or Die BedStuy

In December of 2007 I predicted that they will compete in a losing battle with the soon to be larger residential home and land owners looking to move properties at highly discounted prices: the banks sitting on foreclosed properties - Bubbles, Banks and Builders.

Well, although I do feel I have been relatively prescient in my predictions and predilections, all of you guys who were waiting for me to be wrong can now have your day. As it turns out, the largest residential land home owner will probably not turn out to be Countrywide (see Would you buy Countrywide if all of its bad mortgages were magically wiped off the books?) or any other bank or builder after all, but most likely the FDIC, or in more direct terms - You, Mr. and Mrs Taxpayer, see: FDIC Holds $1.8 Billion in Property From Closed Banks: WSJ Link. There are properties repossessed this year by the FDIC that were actually also repossessed during the S&L Crisis. Talk about not learning your lesson!

I see about 1,300 to 2,000 banks going under before this is all said and done. We are at around 150 now - yes, we have a loooong way to go. The bigger banks to fail have yet to do so, and the government is going to attempt to prop them up by any means necessary. The problem is that there are significant losses in the system, and those losses must be taken by somebody, sometime. They will not just disappear.

Countrywide and WaMu were swallowed by bigger banks (members of the anointed 19) before they popped, but this meal has made the diner's very, very sick. It is not as if these banks weren't telegraphing their problems WELL in advance. If I was able to see it, then the regulators should have seen it as well. WaMu took 5 consecutive quarters of losses in its mortgage division before the problems hit the financial media. This was called out early in September 2007 - Yeah, Countrywide is pretty bad, but it ain't the only one at the subprime party... Comparing Countrywide to its peers.

Now, Geithner has promised that none of his anointed 19 banks will be allowed to fail, but I do see that some of them have taken on a significant amount of horrible (and getting worse) assets. It may very well be that he would not allow them to fail, but that just means that they will be dumping the liabilities upon you Mr. and Mrs. Taxpayer. Call me plain vanilla and old fashioned, but I still believe the investors should bear 100% losses before any taxpayer capital is touched. Well, just as I called out WaMu and Countrywide with significant margin (in terms of time) to do something about the problems - I'm calling out all of the rest as well - "You've Been Bamboozled, Hoodwinked and Lied To! Here's the Proof. What Are You Going to Do About It?"

I, again, refer you to the relationship between GDP and property values in Japan from the "Bad CRE, Rotten Home Loans, and the End of US Banking Prominence?" post.

Yes, we may get a pop in GDP, but GDP was also soaring along when these problems originally manifested as well. We need to focus on the actual problem, and not the academic thesis that is falsely marketed as the panacea to the problem. See (again) "Who are ya gonna believe, the pundits or your lying eyes?" (for pictures), "Who are you going to believe, the pundits or your lying eyes, part 2" (for numbers and a very shaky video), and Boo!!! Will Halloween Scare the Market into Respecting the Fundamentals? for an idea of what needs to be cleared up in this space before we move forward.

The markets in the links directly above actually got WORSE over the summer, despite the Fannie Mae, FHA and Federal homebuyer tax credit incentives - all three of which are unsustainable. What do you think happens when these bubble blowers expire? See "City sees rise in stalled construction sites since the summer, especially in Brooklyn": The number of stalled construction projects continues to mount, as the most recent set of Buildings Department statistics shows an upsurge of 42 percent in Brooklyn sites and 40 percent in Manhattan sites since the summer. Despite what you may have heard, the real estate problem is getting much worse, much faster. There may be more sales occurring, but that is at the behest of massive stimulus: hundreds of billions of dollars of mortgage market interference from the Fed buying MBS, tax credits, ZIRP, trillions to the banks through the back door, etc. The sales are natural and welcomed, but they pale to the source and depth of the supply. Even when said sales do occur to clean out the system, they set market marks that are way below what many lenders and investors can afford to swallow - hence the commencement of the games! These issues of rapidly deteriorating markets that are manifesting may not show up in popularized indices and reports, but a simple walk down the street in major urban and suburban centers is all you need to confirm what it is that I am saying - hence the impetus for the pics and videos linked above. This is why Bernanke is no where near ending stimulus. See "Bernanke Signals 'Extended Period' May Be Even Longer as Joblessness Rises". If he stops now, property markets and many banks will literally collapse, despite the many proclamations that we have exited the recession. It is just not true. We have succeeded in masking some of the symptoms of the recessionary period, and even that is suspect. The main drivers of economic health, employment, income and wealth, are moribund, indeed!

These events tie in to the land recession posts that I reposted yesterday:

Reggie Middleton
Reggie Middleton, LLC
Perpetual Interests, LLCTM
http://boombustblog.com/

Who am I?

Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree.

Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not sell advice, I am not a reporter hence do not sell stories, and I do not sell research. I am an entrepreneur who exists just outside of mainstream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it! I welcome any and all to peruse my blog, use my custom hacked collaborative social tools, read the articles, download the files, and make a critical comparison of the opinion referencing the situation at hand and the time stamp on the blog post to the reality both at the time of the post and the present. Hopefully, you will be as impressed with the Boom Bust as I am and our constituency.

I pay for significant information and data, and am well aware of the value of quality research. I find most currently available research lacking, in both quality and quantity. The reason why I had to create my own research staff was due to my dissatisfaction with what was currently available - to both individuals and institutions.

So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public without charge - free to distribute and redistribute, as long as it is left unaltered and full attribution is given to the author and owner. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be.

Very recently, I have started charging for the forensics portion of my work, which has freed up the resources to develop the site to deliver even more research for free, particularly on the global macro and opinion front. This move has allowed me to serve an more diverse constituency, which now includes the institutional consumer (ie., investment turned consumer banks, hedge funds, pensions, etc,) as well as the newbie individual investor who is just getting started - basically the two polar opposites of the investing spectrum. I am proud to announce major banks as paying clients, and brand new investors who take my book recommendations and opinions on true wealth and success to heart.

So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities. I have included a more in depth bio at the bottom of the page for those who really, really need to know more about me.

Visit his blog Boom Bust Blog.