Tuesday, July 8, 2008

Where's the Beef?

Clara Peller, put Wendy's on the map by simply asking one question: "Where's the Beef?"

The problem with the bullish scenarios is Clara's question: "Where's the beef?"

If you wanted to wreck havoc on the financial system, could you think of another President with policies that could of done the job any better (ie been more detrimental) than Bush? Or Bernanke at the Federal Reserve? Or Paulson at Treasury? From Iraq, to burning food for fuel, to "contained" sub-prime, to the Fed's "refined" attempt at surgically ingesting funds into the banking system with it's alphabet soup of products, and Secretary Paulson miming Elaine Chao at the Labor Department with the "party line" telling us that the economy, like the job market is resilient, and the dollar, is "fundamentally strong"----Could you of hand picked a worse group?

Probably the only economic reports that this crew reads are the ones written by Brian Wesbury of First Trust Advisors!

"Where's the beef?"

If you haven't heard Clara in 24 years, you may have forgotten what she said at the end of the ad. "I don't think anyone's back there."

Look what's happening in San Fransisco. The Presidential Memorial Commission wants to rename the Oceanside Waste Pollution Control Plant the George W. Bush Sewage Plant, ostensibly because they feel it will take the next 10 or 20 years to clean up this mess.

When you start trying to name sewage plants after a sitting President, it tells you that the economic landscape is far worse than any other government statistic. And now, the bears have open season on what the Federal Reserve calls the "negative feedback loop."

Just look at what happened yesterday when Lehman said that Fannie and Freddie may have to raise $75 billion in fresh capital. That news knocked the market down 150 points. At least Lehman should know something about raising capital. They don't believe their balance sheet, and they don't believe anyone else's!

So to paraphrase Clara Peller, let me ask, "Where's the Bids?"

Where are the bids on these "cheap" banks? Where was JP Morgan's $8 "takeunder" for WaMu? Now WaMu would rush in their arms. If these banks, that have gotten crushed are such buys, why can't we find another buyer beside Ken Lewis or the shotgun marriage of Bear Stearns? Where's the bids?

The reason there is no bids, are because the banks own all the liar loans. But they all reside in Level 3 assets, that they say are worth way more than what the market says they are worth. IndyMac showed us yesterday that you can't get any bids for any of this paper. The only bid Lehman got for their paper, was when they seeded a hedge fund to take theirs. If no one will bid for this, and these assets make up more of the capital than the some of these banks have on their balance sheet, who is going to give a bid?

Where's the Bids? Where is the hundreds of billions that are needed to resolve this problem? Oh that's right. That money is in Iraq! You can't give a bid, when you don't have any beef!

But the market is soon to be littered by the failure of hundreds of small banks. Take a look at this article in today's WSJ:

The future looked bright when several small banks decided to open in this city along the Gulf of Mexico. Property values in southwest Florida were surging, and older start-up banks had sold themselves for handsome profits after just a few years in business.

Now, though, for-sale signs dot shopping centers, offices and vacant lots. Developers are desperately hawking vacant houses built on former farmland. In nearby coastal hamlets, some clusters of homes are half-built, with wires dangling from garage ceilings and pipes sticking out of the ground.

"They went hog-wild and made far too many of these loans," said Tramm Hudson, a local banker who advised Coast before it was sold.

More than 630 banks were launched from 2003 to 2007, according to SNL Financial LC, a Charlottesville, Va., research firm, raising more than $8.9 billion in capital.

630 banks? Who were they making loans to? Residential and commercial construction looked to be a good bet back then. So that's where the money went. But commercial is starting to get hit. We now have the worst vacany rate in strip malls in 30 years!

U.S. store closings and cutbacks turned the second quarter into the worst for strip mall owners in 30 years, as budget-conscious consumers flocked to low-cost warehouse-style grocery centers, according to a report by real estate research firm Reis...

"The downward pressure on rent is coming from landlords being very nervous about the idea of losing a tenant when they know that there's a paucity of replacements for that tenant in the current market environment," Chandan said.

The consumer will just go and shop at WalMart. They don't need these stores, and they're finding that they are a lot of things that they really don't need in their life. With stores stopping expansion, and selling poorly performing stores, vacanies are only going to go higher. Do you think the above 630 banks that had commercial and residential real estate exposure is now coming back to bite them?

Last week, China balked at higher coal prices. Yesterday General Motors and the automakers balked at steel surcharges. Now tenants are balking at the rent the landlords are charging in malls. Soon pricing pressure will be downward, not upward!

Does anybody really think that commercial real estate will remain unscathed? These REIT's are in the same position that many of these banks were a year ago. General Growth Properties yesterday increased it's dividend 11%, but the stock is at 31, down from 57.

The market has already come to that conclusion, it's just that the masses haven't realized yet.

So where are the bids? It's getting to the point that they need to start coming and fast. Otherwise, the "negative feedback loop" will embolden the shorts to go after these banks, and fear will overpower any buyer's conviction.

So if you want to bottom fish, look for some bids. Otherwise you'll just end up with carp instead of trout.

But when the carp start getting this big, it's tempting to go out and fish. It's just that there are too many bears at the trout stream!


Anonymous said...

Needs editing for grammar. Thank you for the thoughts though. Sam

Palmoni said...

Yeh it was pretty weak on the grammar. Too many thoughts in too small a space!