Tuesday, November 30, 2010

Morning Note...

Futures ~85bps lower this morning as the EUR/USD trades down to 1.29 (-1%), European CDS are trading wider, and European bond spreads vs. “safe haven” Germany have blown out wider…all on concerns that Greece and Ireland are merely the “canaries in the coal mine” and that Spain’s financial situation is analogous to that of Lehman Brothers, tipping off a double-dip recession or at the very least “Credit Crisis, Part 2.”  As expected, supposed “safe haven” plays are bid higher this morning, with Gold up 1.25%, the USD up 60bps against a broad currency basket, and U.S. Treasuries are bid higher (meaning yields are lower).  Europe is down ~1% on the aggregate, and Germany is outperforming, down only 40bps.  Asia was broadly lower overnight on continued concerns over potentially combative North Korea and monetary tightening in China.  In economic news, the CaseShiller Home Price Index dropped 1.5% versus one year ago.  Chicago PMI and November Consumer Confidence data is due at 10am. In corporate and M&A news, Seagate (STX; -4%) has reportedly terminated talks to be acquired by private equity firms.   Note that November’s official jobs report is due this Friday at 8:30am. 

Regarding European sovereign concerns, here’s this morning’s take from Goldman Sachs:


Good morning- European sovereigns are wider across the board as contagion concerns weigh on investor sentiment.

Yields on Spanish and Italian government bonds reached fresh highs today; yields on 10y Spanish bonds climbed as much as 20bps in early trading to 5.59% before settling back to 5.46% by late morning while yields on 10y Italian bonds were up +3bps to 4.64%.

Investors turned to German bunds, seeking relative safety- sending 10y yields down -6bps to 2.68%.

Peripheral cash spreads are off the wides, although we are starting to leak wider again.

We have seen official buying in higher beta names through the morning and some domestic buying of Spain.

We saw a similar dynamic yesterday but sizes were not big enough to support spreads materially.

In sov cds, both accounts and the street are lifting protection across low and high beta names.

Similar to cash, we are off the wides but as NY comes in, we are seeing more buyers of protection which is causing spreads to leak wider. As per below, note the significant moves wider in low-beta names. Indicative levels below – flows are robust and market moving quickly.


ITALY                 271/276      +27.5
SPAIN                379/389       +32
PORTUGAL          555/575       +28
IRELAND            615/635       +12
GREECE             962/982       +30
FRANCE             104/108       +7.5
GERMANY           58/62        +9
UK                    75/80        +2.5
AUSTRIA           94/100       +9
BELGIUM            190/202       +18
NETHERLANDS   60/64        +5

And speaking of the CDS market, here’s something very interesting from yesterday, in case you missed it.  In short, the larger players in this space might be pulling back on forthcoming regulation concerns, thus the CDS markets may be much less liquid than in the past:

            Wall Street Shrinks From Credit Default Swaps Before Rules Hit  2010-11-29 05:00:35.1 GMT

Nov. 29 (Bloomberg) -- Trading in credit-default swaps, Wall Street’s fastest-growing business before the credit crisis, has tumbled 40 to 60 percent from three years ago as banks prepare for new regulation of derivatives. The declines estimated by executives at four of the biggest dealers of swaps means lower profits at firms that used to get as much as two-thirds of credit-market trading revenue from the derivatives. Moody’s Investors Service says pending rules may translate into job cuts of as much as 50 percent in groups that trade the contracts. Investors are avoiding strategies that contributed to $1.82 trillion in writedowns and losses amid the worst financial crisis since the Great Depression. The net amount of credit swaps outstanding globally has fallen 20 percent from October 2008, the earliest figures disclosed by the Depository Trust & Clearing Corp. in New York. “This was a major profit center for a lot of banks,” said Hal Scott, a Harvard Law School professor who also is director of the Committee on Capital Market Regulation, a nonpartisan group of academics and business executives that in May 2009 called for measures to reduce the risks derivatives pose. “It’s part of a bigger picture of reduced financial activity due to uncertainty and regulatory reform.”

            $62 Trillion

While JPMorgan Chase & Co. created credit swaps in the 1990s as a way for investors to protect themselves against loans going bad, trading soared after the industry began developing standard terms by 2003. The contracts, in which a seller of protection is paid an annual premium for agreeing to cover the buyer’s losses should the underlying borrower default, ballooned to more than $62 trillion at the peak in 2007 on a gross notional amount from $632 billion in 2001. In October 2008, Richard Fuld, then chief executive officer of Lehman Brothers Holdings Inc., blamed his firm’s collapse partly on “destabilizing” forces including the escalating cost of swaps on the investment bank’s debt. Hedge fund manager George Soros called the market “unsafe,” and billionaire investor Warren Buffett once likened derivatives to “financial weapons of mass destruction.” Unlike with Treasuries and corporate bonds, dealers don’t disclose historical trading volumes in swaps. The four banks provided estimates on the condition they not be named. Derivatives are contracts whose value is tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

            Fed Data

The five biggest dealers -- JPMorgan, Goldman Sachs Group Inc., Morgan Stanley, Citigroup Inc. and Bank of America Corp. -- bought a net $430 billion of credit protection as of Sept. 30, down 38 percent from $689.9 billion in March 2009, filings with the Federal Reserve Bank of New York show. Barclays Plc analyst Roger Freeman in New York estimates that before and during the credit crisis, Goldman Sachs generated two-thirds of its credit-trading revenue from derivatives. The contracts now likely contribute about a third, with the rest coming from bonds, he said. Michael DuVally, a spokesman at Goldman Sachs in New York, declined to comment. Average daily trading in U.S. corporate bonds fell 12 percent the past six months compared with a year earlier, according to the Securities Industry & Financial Markets Association, a trade group. While Freeman expects a rebound once regulators meet their July deadline to write market rules, the changes will likely squeeze profit margins and prompt bank executives to cut more trading jobs.

            ‘Growing Comfort’

“There seems to be growing comfort over the structure of this market and how it’s going to evolve,” Freeman said in a telephone interview. “So I’d say we and people in this business are cautiously optimistic it grows from here.” Credit-derivatives departments were some of the hardest hit when the U.S. securities industry slashed more than 80,000 jobs after the financial crisis, according to Michael Karp, the chief executive officer of Options Group, a recruitment firm in New York. Banks that employed 20 to 30 people in credit derivatives sales and trading in 2006 and 2007 now have between 5 and 10. The Dodd-Frank financial overhaul, signed by President Barack Obama in July, is intended partly to curb risks to the economy from swaps. It will require most trades to go through clearinghouses that are capitalized by the banks and demand uniform amounts of collateral backing the trades. To reduce opacity that Commodity Futures Trading Commission Chairman Gary Gensler says gives banks an information advantage, trades will have to be done on systems that make dealers compete over pricing and may automate some transactions now done by phone. The deals also will be reported publicly.

            Declining Margins

The changes may drive down pre-tax profit margins for credit swaps to 22 to 23 percent from about 35 percent, said Sanford C. Bernstein & Co. analyst Brad Hintz, ranked by Institutional Investor as the top analyst covering brokerage firms. “That’s a big drop,” he said. “But it doesn’t mean the business goes away. It just becomes a cash business like the equities cash business or a corporate bond business.” Goldman Sachs Chief Executive Officer Lloyd Blankfein described such a scenario at a Nov. 16 conference sponsored by Bank of America. After changes in equities markets drove commission rates down and volume up for the bank, the firm invested in new computerized stock-trading platforms and was able to slash half the department’s 5,000 trading jobs, he said. Regulation of the over-the-counter “derivatives market will drive greater transparency and automation,” Blankfein said at the conference. “While transparency can reduce margins, it also introduces new opportunities in the form of greater client participation and product innovation.”

            Fed Clamps Down

While the creation of swaps in the 1990s freed up capital to allow banks to make more loans, they also made it easier to bet on or against a borrower’s creditworthiness. Trading in the contracts grew so fast that banks struggled to keep up with the paperwork. Former Federal Reserve Chairman Alan Greenspan complained at an industry forum May 2006 that dealers often recorded trades on “scraps” of paper, calling the practice “appalling.” Concerned that a backlog of unconfirmed contracts could trigger a loss of confidence, the Federal Reserve Bank of New York forced dealers to clean up their recordkeeping. Hedge funds and banks started using the contracts to speculate on the ability of companies, governments and even homeowners to repay debt they didn’t hold. American International Group Inc., once the world’s largest insurer, needed a $182.5 billion government bailout because of credit swaps it sold that guaranteed payment of subprime mortgages.

            Rules in Flux

Congress considered banning investors from buying swaps if they didn’t own the underlying debt they were insuring. Though that proposal died, the threat contributed to the slowdown in trading. Would-be users of the derivatives are staying out of the market until they determine how stringent the final rules will be once regulators impose them next year, Hintz said. “No one’s going to enter into a credit-default swap when you don’t know what the rules are going to be going forward,” Hintz said. Before 2008, as much as half of the trades in the market were done to create and protect against losses from so-called synthetic collateralized debt obligations that investors bought to bet on the creditworthiness of companies and countries. The market for CDOs, which are securities made up of bonds sliced into different levels with varying degrees of risk and returns, is in decline, with $72 billion of the securities created this year, down from the record $503 billion in 2006, according to Morgan Stanley.

            Less Hedging

Money managers who bought swaps protecting against plunging asset prices in 2008 unwound those hedges in 2009 as markets rebounded, said Andy Hubbard, head of U.S. structured credit trading at Credit Suisse Group AG in New York. “Now that we’ve recovered, people aren’t as worried about credit risk and there’s not the same degree of hedging happening,” Hubbard said. Banks have more than made up for the loss of revenue from dealing in credit swaps by trading the underlying bonds. Institutions that once derived about 70 percent of debt-market trading revenue from swaps and the rest from bonds have largely reversed the ratio, said Alexander Yavorsky, a securities firm credit analyst at Moody’s in New York. A surge in bond trading helped drive Goldman Sachs’s revenue from buying and selling securities and derivatives in the fixed-income, commodities and currencies markets to a record $23.3 billion last year, according to company statements.

            New Products

With volume in that business declining, fixed-income revenue at Goldman Sachs, JPMorgan, Citigroup, Morgan Stanley, Credit Suisse, Bank of America, Deutsche Bank AG and Zurich- based UBS AG slipped an average 12 percent during the first nine months of 2010 from the same period in 2009, regulatory filings, investor presentations and Bloomberg data show. Only Morgan Stanley and UBS reported a gain. To make up for lost revenue, banks are considering products they rebuffed three years ago: futures contracts that would be tied to benchmark credit indexes and traded on exchanges such as CME Group Inc. Goldman Sachs, Deutsche Bank, Morgan Stanley and Barclays are among dealers coordinating with credit swaps index owner Markit Group Ltd. to potentially offer exchange-traded futures linked to the Markit CDX indexes, people familiar with the discussions said last month. The contracts would open the market to small hedge funds, equity investors and money managers that don’t trade the contracts enough to justify the cost of negotiating two-party agreements with banks, said the people, who declined to be identified because the talks are private. “The world’s changing and the regulatory pressures are changing the rules of the game,” Andy Nybo, head of derivatives at research firm Tabb Group LLC in New York, said in a telephone interview. “The dealers are adapting and looking to remain relevant and create the products that their clients want and need.”

RIMM upgrade at JEFF.  BEZ to be acquired by ABB.  VSI to offer 6.3M share secondary.  ZOLT lower on earnings.  ALTR reaffirmed guidance.  EBAY cut at PIPR. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 
Today’s Trivia:  What type of ads were banned from television in 1971, costing networks roughly $200M in revenue at the time?
Yesterday’s Question: Where was the potato first cultivated, reportedly in 200 A.D.?

Yesterday's Answer: The potato was first cultivated in South America

Best Quotes:  BofAMLCO trader note…

“Good Morning - The yen strengthened to an 11-week high against the euro as speculation China will take more measures to cool its economy and Europe's debt woes will worsen boosted demand for safer assets.    Unemployment in Germany fell for the 17th straight month in November (-9k to 3.14mn) being driven by a "dream start" to the Christmas shopping season.   Portugal and Italy 10 years are off less than 0.5% after yesterdays beating.   Citi says Portugal to seek their bail out soon, as the country is insolent.   U.S.  banks are reported to have added 90 billion in commercial deposits in the 3q.  which brings the total deposits to 6 trillion or the most since 1992.  Cash is king.  Economic out today, Case-Shiller, Consumer Confidence, Chicago PMI.   Bernanke to host a “conversation on the economy”.   Energy outpaced the S&P’s yesterday, while the Service sector outpaced the entire market.   1189 was yesterdays low, and 1200 is still the key upside resistance level.    1174 is the 50,  1172 was yesterdays low, and 1171 is the month low.   I still think we rally into the year end.   We appear to be weathering the storm in an orderly fashion.  Buy the dips.”

Monday, November 29, 2010

What the Buffalo Bills can teach us about the U.S. economy + more Miami...

Economic lessons from the 2010 Buffalo Bills...

Here's a little-known secret that may irreparably damage my reputation for some readers:  I am a closet Buffalo Bills fan.  I don't want to be, believe me.  But I must be, because each Sunday I find myself just a bit more interested in the Bills score than the others.  I assume it's a remnant from my time growing up in Buffalo - a leftover feeling of camaraderie and hope from watching a horrible early 80's team (Joe Ferguson, really?) develop over time (#1 pick in '85: Bruce Smith, the addition of Jim Kelly at QB, the 2nd round pick of Thurman Thomas, Andre Reed, etc.) into the early 90's juggernaut that, although it lost four straight Superbowls, still managed to get there each year.  I suppose there's a loyalty that is built up over time when you watch something grow and develop, as I watched the 1984 to 1994 Bills, and you find yourself emotionally involved.

This brings me to the present day Buffalo Bills.  They are 2-9.  Terrible by all accounts.  And, unlucky to boot - they've lost three overtime games this year already.  But do you know what?  I love this team.  I would pay money - if I still lived in Buffalo - to watch this scrappy bunch of no names take elite teams like Baltimore and Pittsburgh to the brink.  They have chemistry, they have grit, and they have hunger...and if management was smart, they would build around those intangibles as a foundation for something real.  Keep Fitzpatrick as QB - the players love him, he's a gunslinger with balls and big heart - rather than give into the temptation to go for the glamor QB pick in the draft.  Don't touch the skill positions - high character and class act Fred Jackson should never have been on the bench at all this year, shame on management for essentially discriminating against a small school player in favor of a guy like Marshawn Lynch....and you are set with WRs Lee Evans, Steve Johnson, Roscoe Parrish, and RB CJ Spiller as potential game breakers.  Don't touch the secondary - there are some young, skilled studs back there.  Instead, focus on the foundational, no-headline-grabbing drafting of offensive and defensive linemen...build around guys like Eric Wood and Kyle Williams and add depth to the core, trench areas that ultimately determine wins and losses. 

Ok, so how does any of this relate to the U.S. economy, you ask?  Last year's Bills - the 2009 version - were awful (just like the 2008-2009 U.S. economy), and it was clear to anyone objective that they needed line help (aka, nuts-and-bolts foundational stuff...like jobs to the U.S. economy).  But instead, the Bills management (aka, the Federal Reserve?) made the decision to pursue a short-term "headline-grabbing" fix (aka, artificial stimulus) and signed wideout Terrell Owens in order to sell a few more season tickets rather than address their more important, long-term needs.  Owens, of course, proved to be not much more than a one-and-done bust, along with the very weak 2009 incumbent QB Trent Edwards (aka, Tim Geithner?  anyone, anyone...?)

So what's the lesson?  Well, the 2009 Bills got nothing out of their artificial stimulus injection (Owens), much like the true, underlying U.S. economy got from its injection.  This year, however, the analogy diverges.  The 2010 Bills cut their dead weight (Edwards) and decided to let their down cycle run its course (much like a recession should be allowed to run its natural course) and along the way have actually built character and chemistry through hard, gritty play and effort.  Conversely, the 2010 now-highly-politicized Federal Reserve decided to once again forgo addressing foundational issues in the U.S. economy (massive debt, jobs) and are going for the short-term, glamorous, headline-grabbing fix (aka, Quantitative Easing 2).  And much like last year's Bills artificial Owens injection, it's pretty clear to me that this year's Fed QE2 artificial injection will have similar one-and-done results.

In short, this year's Bills team is bouncing back from a rough patch all on its own - the spark is there, the chemistry is there.  It's palpable, and they should be applauded.

But this year's Federal Reserve is unfortunately going the way of the 2009 Bills - laden with an egotistical superstar (QE2) who distracts the mob from the real issues at hand for only a short while before they resurface again.  Caveat Emptor, folks.  The Fed could learn something valuable from this scrappy Bills team:  recession (aka, rebuilding) takes time and is not a dirty word to be avoided.  In fact, it can sow the seeds for greatness for years to come, just like the 1984-1985 Bills.  Are you listening, Bernanke?  It's Ryan Fitzpatrick on the line...and he's asking you to grow a pair. 

More Miami driving... 

My Dad taught me an important lesson about basketball referees when I was younger.  "Good refs or bad refs don't really matter much," he explained.  "It's the inconsistent refs who are most dangerous."  His point was that players can adjust to a referee who makes consistently good calls or consistently bad calls...and to the referee who makes consistently tight calls or instead lets the ticky-tack stuff go.  But a referee who is inconstent - good, then bad...tight, then loose - can ruin a game.

Which brings me to my most recent rant about Miami driving:  Miami drivers are notoriously inconsistent, and it drives me consistently crazy. 

Inconsistency #1:  On surface roads (local streets), Miami drivers routinely crawl along at a snail's pace.  No rush, no stress, clearly no friggin' job - or anything else important - to get to.  As I have written before, a Miami driver rarely goes at a green light until a count of "one-mississippi...two-mississippi" has passed.  90% of the time I will honk at the guy ahead of me at a green light because the person is busy texting, or talking on the phone, or finishing off that coffee, or actually (I am not kidding) reading the paper while driving.  So you could safely argue that Miami drivers are slow, sluggish, and unresponsive on surface roads.  However, please explain why those very same drivers become Evel-freakin-Knievel as soon at they enter the highway, especially I-95 (just named the most dangerous road in America, btw.)

Look, I am a pretty fast driver at times, but I am generally efficient and safe (knock wood!)  But I-95 scares the bejeezus out of me.  As soon as I slow to 70mph (from 75mph, let's say) behind a slow-moving truck or someone that I need to pass, people whizz around me on both sides at ~90mph so that I can't actually change lanes.  And usually, when these people buzz past (and they do "buzz" past - the lanes are notoriously narrow on I-95...hmmm, maybe there's a correlation between that fact and the mortality rate on this road, eh Miami?), they are also either on the phone or texting at the same time.  WTF?  Seriously, WTF?

So how can the same folks who fall asleep at green lights on surface roads also become speed-racing, texting psychopaths on the expressway?  Miami, pay attention please:  just like in basketball refereeing, inconsistency kills...

Inconsistency #2:  I have written about the innate laziness of the Miami driver before.  For example, it must simply be too taxing - too damn hard - for people to actually flick their wrist and click that turn signal to indicate that they are changing lanes or suddenly slamming on the brakes and making a turn.  I know, that seems like a lot to ask!  In the routine course of daily driving, people never seem to use turn signals when they would be of actual benefit to the broader public.  Instead, a level of "driving ESP' is required:  hmmm, is that guy pausing a touch...I dunno, I don't like the looks of his swerving....I think he's a sudden-turn candidate...CON-SONAR...CRAZY IVAN!  (Which way did he turn, Jonesy?  To the starboard, sir!!)  Anyway, the lack of turn-signaling leaves you constantly guessing on Miami roads.

Except for this amazing discovery...when a road naturally curves to the right or the left - meaning there is no choice on which way to go - do you know what Miami drivers will do?  Yes, they will put on their turn signal!!  WTF?  Aaaaarrrrrrghhhhh.  I mean, just shoot me.  Why the hell would you indicate that you are turning when we all know you are turning because the road is actually going that way and we are all turning too?!  Folks, if I sound a little distraught, it's because this stuff is enough to drive a person insane.  Or maybe it already has.  And bear in mind, I am not talking about one isolated incident here - I am telling you that I have seen it over and over and over.  And given that 70% of Miami is Hispanic, I really think someone with driving experience in Cuba or South America needs to tell me the origin of all this senseless inconsistency.  I just don't get it...

More Miami Heat...

Headed to the Heat-Wizards game tonight, and we'll see if anything has changed since my last visit (Heat-Celtics).  I wrote back in July that the Heat would start 10-10 on the year, and I think they are 9-7 to this point, so clearly I will be routing for the Wizards tonight!

I caught a Chris Bosh post-game interview the other night (I think it was after Friday night's Sixers game) and I have to admit I genuinely like Bosh.  I mean, who the hell ever knows the truth behind these things, but I get the sense that he's a good dude and a likable guy.  (Unlike Wade and LeBron, who I think are probably behind-the-scenes @ssholes, to be honest.) 

Anyway, despite my feelings for Bosh, he said something so colossally stupid that I thought someone should have been fired over it.  He told the sideline reporter (a ridiculous homer named Jason Jackson - just my opinion) that - and I am paraphrasing here - the Heat would be fine as long as he, Wade, and James just did the same stuff this year that they all did separately on different teams last year.  Something like "as long as we do what we each did last year, we'll be fine."  Whaaaaat?  Chris, how ignorant are you?  And how bad is Miami's coaching or managing if this message is being conveyed?  How bad must things be if Bosh is also speaking for his teammates, and if they really all feel that excelling individually just like last year is the ticket to Miami's success this year?  Folks, that's moronic.  He advocated the construct of three superstars playing like individuals and then expecting a team to sprout out of it.  Where is the team concept?  Where is the buy-in from the stars?  Where is the humility and the admission that these guys need to be flexible and feel each other out and even make some sacrifices along the way in order to arrive at something where the whole is greater than the sum of the parts?  (Pssst, Chris....here's a hint:  that's the definition of a team)

Look, I have beaten the Heat dead-horse enough at this point, but I have to say that if the message from Heat management down to Heat coaches and down to Heat stars and down to Heat players is "just do what you did as individuals last year and we'll be fine," then the Miami Heat are in much, much bigger trouble than anyone might have thought.  That attitude needs to be re-framed, in a big way.  When stars come together, sacrifices are needed - someone has to take the charges, someone has to make the extra pass, someone has to box out...and it can't just be the two other role players on the court at the time.

We'll see how it looks tonight, but after Bosh's comments the other day, I remain a non-believer... In fact, the Miami Tepid jokes are too obvious at this point.  Let's get classical instead and just go with the Miami Hubris.

Morning Note...

Futures ~30bps lower this morning as markets digest the official EU85 billion Ireland bailout (European markets are ~1% weaker, EUR/USD breaks below 200-day moving average), consider the EC’s slight downward 2011 GDP revisions and cautious forward commentary, and process U.S. retail sales data (positive, but generally weaker than expected) for “Black Friday.”  Drilling down on retail sales a bit, the National Retail Federation reported sales of $45 billion over the weekend, up 6.4% from last year.  On the other hand, Shoppertrak reported Black Friday sales up only 0.3% and traffic up 2.2%, both of which disappoint expectations.  Given the strong retail focus this morning, it’s worth a cut-and-paste from the Barclay’s retail desk (from last night):

It seems like Shoppertrak (which is the most high profile and well respected consultant for Black Friday results) is the only source that is negative on how sales went this weekend.  If I'm not mistaken, last year Shoppertrak said that sales increased 0.5% on Black Friday, but the Census Bureau data later showed that sales in November increased 2%.  I realize thats not apples to apples but I think the point is that both bulls and bears will have plenty of data points from this weekend and its just too premature to make any sort of sweeping generalization around how sales went.   

When everyone gets to work tomorrow the headlines will be negative (Ireland bailout and Shoppertrak saying Black Friday only up 0.3%) so don't be surprised to see the market indicated lower.  Its still feels easier to be short than long given the big run that retailers have had, a dicey macro backdrop overseas and the governments recent interest in money managers.  However, just be a little careful.  There are going to be winners and losers in this holiday season and it feels like investors are having a tougher time find shorts than longs.  Moreover, November started out quite well and I don't think it would surprise anyone if the month was a beat when sales are reported the first week in December. 

Regarding Europe’s weakness and the Irish bailout (when do the Irish drinking jokes begin to circulate, btw?), here is some good commentary from Morgan Stanley:

The much-awaited details of the Irish bailout and bank-restructuring package released today were broadly as expected.  Positives in the announcement should be constructive for the EUR near term.  At the same time, the risk of contagion to Portugal and (to a much lesser extent) Spain remains undiminished and should continue to cap EUR upside into yearend.

The overall bailout amounts to €85bn as reported earlier, but there were some positive surprises in the details.  Reliance on external funding is smaller than expected, with the Irish National Pension Reserve Fund contributing €17.5bn of the total and the European Financial Stability Mechanism, the IMF and the EFSF (plus bilateral loans) €22.5bn each.  As reported in the press earlier this weekend, bailout loan maturities may be stretched to up to 10 years (also for Greece), which would ease (but not eliminate) acute refunding pressures post 2013.  And it appears that, while EFSF funding will carry an 5.8% interest rate, the rates on IMF and EFSM financing will be significantly lower.  Finally, easing Ireland’s adjustment burden somewhat, the Government will have an extra year (until 2014) to meet the 3% budget deficit target.

The bank-restructuring plan – €10bn for immediate recapitalization plus €25bn in reserve for future needs – was reassuring in that no haircuts will be imposed on senior bank bond-holders, which reduces the risk of contagion to financials across EMU.  Also constructive, news on the post-2013 credit resolution mechanism (CRM) confirmed that private sector participation would be limited to post-2013 debt and occur on a case-by-case basis only.

In last week’s FX Pulse Overview, we argued that, since the early fall, contagion risk has been the main link between peripheral EMU sovereign risk (see attached) and the EUR.  From this perspective the prospect for sustained near-term EUR upside still looks limited.  The Portuguese government is fully funded through yearend, but appears vulnerable to contagion psychology in the market-place.  It faces a hefty redemption schedule in January and February, and (in contrast to Spain) it is heavily reliant on foreign investors and its small size makes it vulnerable to a buyer “walkout.”  As a result, the ECB’s willingness to support peripheral EMU bond markets, and thereby to defuse contagion psychology, could turn out to be crucial for EUR stability near term.

Note that November jobs data is due this Friday and will be closely watched.  More trader talk, including the official first use (at least across my desk) of the “Santa Claus Rally:”

There are lots of economic data this week for folks to mull abut.   The November employment report will be released Friday, and expectations are 150,000 the same number that we got in October. The November jobless rate is expected to remain at 9.6%. If that forecast proves correct, it would be the fourth-consecutive month that the rate was 9.6%.  Same Store Sales for the Month of November also out on Thursday, they will include black Friday and Cyber Monday in the report.  The overarching takeaway seems to be that trends were solid during black Friday with earlier store openings and in general a very responsive consumer.  It appears that the Irish have worked out a deal.   What you need to watch is how the bond market reacts today.  The European markets had started out strong, and the SPZ were up 10 ticks on the clarity, but have given it all back.  The costs to insure Irish, Greek and Portuguese debt has been rising even as finance ministers talk of 'bailouts.'  Banks continue to be for sale, and that is another negative talking point.  Things continue to escalate on the Korean peninsula, as China has now asked for six party talks to cool tensions from the North Korea attack last week.   Escalation there could cause investors to dump stocks here.   Lots of negativity, if we can make it thought this without any serious damage a Santa rally is still in the cards.   Have a great day. 

BCAP ups RDC, SPN.  CSFB ups FDX, SJR.  GSCO ups MTL, TX.  Janney ups AEO.  JPHQ ups ROSYY.  WEFA ups DE.  CITI cuts AMP.  DBAB cuts FRO.  GSCO cuts TIN.  STFL cuts EBAY.   

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 

Today’s Trivia:  Where was the potato first cultivated, reportedly in 200 A.D.?
Yesterday’s Question:  Believe it or not, there is actually some controversy (admittedly…a tiny bit) over Barack Obama’s claim as the first African-American U.S. President.  Any idea who may have been the first?

Yesterday's Answer:  29th U.S. President Warren G. Harding was rumored to have had a great-grandmother of African American descent. 

Best Quotes:  BTIG…

Celtic Clarity.

Wednesday's recovery led by improving economic data in the U.S. was thwarted by the resumption of global worries.  North Korea escalated its rhetoric as the U.S. and South Korea commenced joint military maneuvers.  Ireland's bailout talks continued to progress, and new uncertainty arose for the senior bondholders at the Irish Banks.  The deterioration of the Irish government's credibility and effectiveness increased doubts about its ability to adhere to its pledge to back the banks' bonds.  The selloff in the bonds and reports in the media fueled questions about whether or not the senior bondholders would be forced to accept a debt for equity swap as part of the bailout.  As in every bailout situation, such a move is a change in the rules during the middle of the game.  

Ireland formally received an 85 Billion bailout today (20% of which is coming from Ireland itself).  The feared worst-case scenario for the banks appears to have been avoided.  The plan calls for 10 Billion in immediate recapitalization of the banking system (with an additional €25 Billion contingency backstop).  The exact transmission of that recapitalization was unclear in the release.  Every official release stresses continuity with the current policy.  It appears that the plan offers the banks 3 months to attempt to raise the necessary capital from the private markets, otherwise, the Irish government will use the bailout funds to backstop them.  

This episode has been marred by Germany's poor communication and mixing comments about a permanent sovereign debt solution post European Financial Stability Facility (EFSF) in mid-2013 with the daily dialogue about Ireland.  The German double talk started to fuel global backlash.  Last week the latest was that former Italian Prime Minister Romano Prodi said German Chancellor Merkel's comments were making matters worse.  Now, on a daily basis, the Germans have been forced to assert that the current bailout will be under the framework of the EFSF.  The Germans did advance their cause for a permanent solution, but the loss sharing the Germans sought is officially delayed to post EFSF in mid-2013.  Plans for a new permanent European Financial Stability Mechanism (EFSM) were announced as part of this plan.  Half of the €45 Billion European contribution to the bailout will be from the EFSM, but despite this development, the Eurogroup was sure to state that "We restate that any private sector involvement based on these terms and conditions would not be effective before mid-2013."  The good thing is that if everyone knows the rules will change to a more responsible structure in 2 ½ years, investors can plan appropriately.  

Domestic Developments.

The positive news domestically was lost amidst the global fears and the quiet holiday trading.  On Friday, half of Wednesday's gains were erased in what was the slowest session of the year.  To add some perspective to how slow it was, volume was down 37% from the post Thanksgiving session last year.  Since September, we have been talking about our expectation that weekly Initial Jobless Claims will break below 400,000 before year-end.  Last week's print of 407,000 was a dramatic step in the right direction.  We expect this to be the new baseline from which Initial Jobless Claims will fluctuate.  

The early headlines on Black Friday activity have commenced.  ShopperTrak noted that Black Friday sales only rose 0.3%, while traffic rose 2.2%.  We would note that by ShopperTrak's calculations, Black Friday sales grew throughout the recession, 3% in 2008 and 0.5% in 2009, so 2010 is a record number.  We think Black Friday sales probably became a more predominant influence on the holiday selling season during the recession as consumers relied upon deals.   For example, although Black Friday sales grew throughout 2008 and 2009, overall holiday sales contracted 5.5% and 0.4% respectively according to ShopperTrak.  Although the 2010 Black Friday growth appears uninspiring, there are a number of positive underlying metrics to this holiday season.  There is the increase in traffic, and increases in purchases for oneself and sales in the first two weeks of November were up over 6% year over year.  

Wednesday, November 24, 2010

Morning Note...

**Happy Thanksgiving…The next Morning Note will be Monday, November 29th**

Futures ~75bps higher this morning, bouncing off yesterday’s weakness due to simmering tempers in North Korea & South Korea, better-than-expected earnings and German business confidence on The Continent, and better-than-expected jobs data in the U.S.  Drilling down on the latter, Initial Jobless Claims for the week ending November 20th were 407k, which is both favorable against the 435k expectation and the 441k prior reading.  Continuing Claims for the week ending November 13th were 4.182M vs. the 4.275M expectation.  In other economic news, Personal Income (+0.5%) and Personal Spending (+0.4%) for October were in-line with expectations, but October Durable Goods Orders were weaker-than-expected, at -3.3% vs. the +0.1% estimate.  In Europe, Porsche (+5%) reported Autobahn-speed sales growth and Germany’s business confidence survey (The Ifo Institute’s Business Climate Index) of 7,000 executives surged to an unexpected record high reading of 109.3.  The euro (+10bps) has steadied against the USD (-15bps against a broad currency basket) and Europe is up 65bps on average as of writing.  However, caveat emptor:  German-Spanish bond spreads continue to widen to record levels in Europe, Portuguese workers are planning the largest national strike in 22 years while credit default swaps on Portugal surge to a record 482bps, and Ireland’s sovereign credit rating was cut two levels by ratings agency S&P.  In Asia, markets were mixed but there was little follow-through (in stock market terms…S. Korea was down 15bps overnight) on yesterday’s North Korea/South Korea conflict.  Elsewhere, expect plenty of information to trickle out of the FBI’s insider trading probe over the coming days and weeks.  (And with the retail investor still reeling from the credit crisis, Bernie Madoff, Alan Stanford, the recession, and the flash crash, how is this new probe possibly a good thing?)  Oil +25bps.  Gold -22bps.  Note that U of Michigan Consumer Confidence and Home Sales data is due at 10am today.  U.S. markets closed tomorrow, followed by a half-day Friday…

BCAP cuts CPB.  RAJA cuts TSS.  JPHQ ups SNPS.  UBSS ups SEP.  BofAMLCO cuts SWS.  JPHQ cuts ROVI.  MSCO cuts WSO.  BARD cuts JCG.  NY Post speculates Carl Icahn may force a CDNS/MENT merger.  AWI declares special dividend.  FRO misses by 11c.  GES beats by 16c.  TIF beats by 9c. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 

Today’s Trivia:  Believe it or not, there is actually some controversy (admittedly…a tiny bit) over Barack Obama’s claim as the first African-American U.S. President.  Any idea who may have been the first?
Yesterday’s Question: Stroke, heart disease, and cancer account for what percentage of U.S. deaths each year?

Yesterday's Answer:  64% of U.S. deaths are attributed to stroke, heart disease, and cancer. 

Best Quotes:  BTIG…

Macro Mayhem, Mishaps & Misery.

It is clearly a "when it rains, it pours" environment from the perspective of headline risk.  In the case of some headlines, the risk is not limited to the news.  North Korean artillery opening fire on a South Korean island fueled what has been described as the biggest flare up on the Korean peninsula since the nations signed an armistice in 1953.  The insider trading probe continued to garner more headlines.  It is starting to appear closely related to the Wall Street Journal story from yesterday.  Last but not least is the ever present Sovereign Debt Crisis in Europe.  The concern with such crises is always related to the contagion fear.  The remarkable aspect of this crisis is that comments from policy makers continually make the situation worse.  Perhaps this should be expected when dealing with a fractious group pursuing diverse interests, but European policymakers appear intent upon testing the markets' limits of understanding.  

Throughout 2010, we have repeatedly been astounded by the actions and comments of the German leadership.  Once again, Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble have made statements leaving us in a state of disbelief.  Today Merkel said "We are in an extraordinarily serious situation regarding the situation of the Euro."  In a speech in Parliament, Schaeuble remarked that "our common currency is at risk."  As has been the case all year, this is politicking in order to garner support for Germany's role in the European bailout.  It would be nice if these policymakers could find a way to convey their political point without the scare tactics that risk a currency crisis.  The Euro was down nearly 2% versus the Dollar today.  Who would think that with all of the Dollar bashing over the past month, the Dollar would be up 7% year to date versus the Euro.  The first thing that crossed our minds upon seeing the headlines were the stories of then Treasury Secretary Jim Baker threatening to weaken the Dollar in response to German interest rate hikes in 1987.  That episode is often considered among the key events fueling the 1987 crash.  By no means should you interpret our parallel to be one of impending gloom.  We are just highlighting that when it comes to the financial markets, politicians should say what they mean and mean what they say.  Markets have a tendency to test idle warnings and empty threats.  Overall, we remain in the bullish camp and while we would like to see some of the macro headline risks dissipate, pullbacks such as this are a buying opportunity for investors.

Tuesday, November 23, 2010

Morning Note...

Futures ~1.10% lower this morning on a combination of sovereign debt issues in Europe (down 1.7% on Ireland’s bailout and Spanish/Portuguese concerns), bank tightening in China (state banks are near lending limits), insider trading crackdowns here in the U.S. (the FBI raided at least three well-known hedge funds yesterday – Level Global, Diamondback, and Loch Capital), and saber-rattling between North and South Korea (an exchange of military fire there threatens to de-stabilize the region).  In economic news, Q3 GDP was revised slightly higher to +2.5% from the prior +2.0% and the +2.4% expectation.  Q3 Personal Consumption was also revised higher to +2.8% vs. the prior +2.6% reading and the +2.5% expectation.  Note that existing home sales data is due at 10am and the most recent FOMC minutes will be released at 2pm.  In corporate news, Hewlett-Packard (HPQ; +2.4%) reported better-than-expected earnings last night, J. Crew (JCG; +17%) is reportedly to be acquired by private equity firms TPG and Leonard Green for $2.8 billion ($43.50/share), Medtronic (MDT; -1.6%) will acquire the rest of Ardian, Campbell’s Soup (CPB) missed earnings estimates, and Brocade (BRCD; -5%) beat by 1c but trades lower.  Asia down over 2% across the board last night.  EUR/USD -1%.  Oil -95bps.  Gold +75bps.   

Elsewhere, German Chancellor Angela Merkel made cautious comments about the euro (it’s in an “exceptionally serious” situation right now).  In political news, I find the departures from the Obama Administration slightly too analogous to the negative warning sign of CEO or CFO departures from publicly traded companies.  Seems like they are lining up at the door to depart.  If the U.S.A. and/or the Obama White House was a stock, would you be long?

Farrell, Barr Leaving Obama Administration’s Economic Team  2010-11-23 07:43:21.35 GMT

Nov. 23 (Bloomberg) -- Diana Farrell, deputy director of President Obama’s National Economic Council, and Assistant Treasury Secretary Michael Barr are leaving the administration; both played key roles in shaping Obama’s financial regulatory overhaul plan.

In terms of commentary, here’s the most recent Hedgeye piece:


"No matter what you do I'm gonna take you down."
-Bob Seger

Bob Seger is a 65-year old American singer-songwriter from Detroit, Michigan. In 1987, he released "Shakedown." It eventually became a #1 hit on the Billboard Hot 100. Most movie-soundtrack buffs will recall this song from Beverly Hills Cop.

This morning the Fun Cops of global risk management have apprehended the perma-bulls. Lest the bulls who don't do mean-reversion forget that the SP500 is still up +77.1% from the March 2009 lows and, as Seger sings, "everybody wants into the crowded line."

This morning's headlines are multi-factor, multi-duration, multi-risk:

1.       Korea sees both civil and military casualties overnight as a 27-year old boy-king in the North makes a statement to the South.
2.       Asian stocks continue to breakdown with China closing down another -1.9% overnight, taking its cumulative decline since 11/8 to -10.5%.
3.       Sovereign yields 3-mth Spanish debt rocket to the upside in a terribly received bond auction yielding 1.74%! versus 0.95% prior.

What does this mean? What do we do? I think those of us who have seen the confluence of the following Top 3 global macro factors colliding for the last month are already positioned:

1.       Global growth is slowing
2.       Global inflation is accelerating
3.       Interconnected risk is compounding

There are plenty of other risk factors causing a Global Shakedown in the immediate term TRADE lines across our interconnected global risk management model (Quantitative Guessing, Financials freak-out, Yield Spread compressing, etc.),  but before we revisit the aforementioned Top 3, let's look at those breakdown lines in some of the major country indices:

1.       SP500 Index = 1,997
2.       Dow Jones Industrial Avg = 11,199
3.       China's Shanghai Composite = 3,008
4.       Hong Kong's Hang Seng = 23,902
5.       India's BSE Sensex = 20,386
6.       UK's FTSE = 5,792
7.       Spain's IBEX = 10,591
8.       Italy's MIB = 21,181
9.       Brazil's Bovespa = 70,929

In risk management speak, we call this Geographical Risk Factoring. Weakness in one country doesn't always interconnected risk make in others. However, sustained weakness across geographies on our most immediate-term risk management duration (TRADE) is usually a very early signal for global risks to compound. These risk factors include: Style Factoring, Size Factoring, Liquidity Factoring, etc...

I'm not saying this market is going to crash today. I'm simply saying that the probability of a correlated and compressed-crash continue to climb. To a degree, this has already happened in Chinese and Spanish equities (down -10.5% and -9.5%, respectively, from their recent peaks in very short order). Again, these are equity market signals. But the equity bulls will have a hard case to make that the Mr. Macro Bond Market has been flashing anything bullish for the last three weeks.

Back to my Top 3 fundamental risks:

1.       Global Growth Slowing - After seeing broad based slowdowns in Asian Q3 GDP reports yesterday (Indonesia, Malaysia, Thailand), this morning South Africa reported a sequential slowdown in Q3 GDP to +2.6% (vs +2.8% last quarter).
2.       Global Inflation Accelerating - The good news here is that post Bernanke's QG = INFLATION experiment taking plenty of commodity prices at or above all time highs, prices have come down in the last 2 weeks. The bad news is that the global inflation genie is out of the bottle and she's hard to stop. Consider this Bloomberg News quote from a Chinese noodle shop dude this morning: "Standing near his 12-table noodle shop on Beijing's Yonghegong Avenue, ower Liu Heliang says meat and vegetable prices have climbed 10% in a year and staff wages are up 40%."
3.       Interconnected Risk Compounding - review all of the factoring I have gone through so far. In the US we think it all equates to Jobless Stagflation.

Now a bull could say that Germany's GDP growth of +3.9% for Q3 was outstanding on both a relative basis to the EU (and the US) and on an absolute basis as the Germans continue to drive exports into a friendly Chinese relationship (Exports up +2.3%). I'll agree with that. That's why we have a 6% position in our Hedgeye Asset Allocation Model to German Equities (EWG).

While we have plenty of short positions to express the Global Shakedown risk (see my Early Look Note from November 8th titled "Tightly Squeezed" where we published our top 15 short ideas across asset classes), there are some things that we really like on the long side (alongside Germany) on a day like today:

1.       Long the US Dollar (UUP)
2.       Long the Chinese Yuan (CYB)
3.       Long Gold (GLD)

From yesterday's price levels, I also think a 64% position in Cash is the right position to be in. Most asset managers will quibble with that for obvious reasons that are structural to their business models, but I really think the better benefit of the doubt this morning should go to the Thunder Bay Bear.

"Shakedown... Breakdown...Takedown... Everybody wants into the crowded line..."

My immediate term support and resistance lines  for the SP500 are now 1172 and 1197, respectively.

Best of luck out there today,

JEFF ups ATU, RBC.  PIPR ups RHT. BARD ups MDAS.  DBAB cuts FLO.  JEFF cuts B, MSM.  BARD cuts JKHY.  UBSS cuts NOC. 

S&P 500 PreMarket 8:30am (last/% change prior close/volume): 

Today’s Trivia:  Stroke, heart disease, and cancer account for what percentage of U.S. deaths each year?
Yesterday’s Question: What sea creature boasts the largest eyes in the animal kingdom?

Yesterday's Answer:  The squid boasts eyes as large as 16 inches in diameter, which represents the largest in the animal kingdom. 

Best Quotes:  A good read for those interested in Miami real estate…

Miami’s ‘Condo King’ Perez Perseveres After $1 Billion in Losses
2010-11-23 05:00:07.1 GMT

By John Gittelsohn
     Nov. 23 (Bloomberg) -- Early this year, as Jorge Perez struggled to restructure more than $1.5 billion of debt on mostly vacant Florida condominium projects, doctors discovered a golf ball-sized tumor on his pancreas.
     “You understand how vulnerable you are,” Perez, 61, said while sitting in his Miami waterfront office, with a view of the skyline shaped by Related Group of Florida, the real estate company he founded in 1979. “You’re here on a loan and you never know when they’re going to call it.”
     Perez, known locally as the “Condo King,” survived the medical scare. In January, after nine hours of surgery to remove the tumor, doctors determined it was benign. Related Group, after absorbing $1 billion in losses, is still standing.
     Last week, the company reached a foreclosure agreement with lenders holding a $223 million mortgage on Trump Hollywood, a 41-floor luxury-condo tower in Hollywood, Florida, where 22 of 200 units have sold. BH III LLC, a Miami property-investment firm, paid $160 million for the note, said Mark Pordes, chief executive officer of Pordes Residential Sales & Marketing in Aventura, Florida, who brokered the deal.
     The sale put the last of Perez’s seven troubled Sunshine State projects behind him.
     “Things are clearing now,” Perez said in a Nov. 19 telephone interview. “Most of the lenders will feel that way.
And we’re talking to many of them and trying to do deals.”

                        Reputation Intact

     Related Group lost four of the seven Florida developments to foreclosure, sold its interest in one to a partner and renegotiated payments on two others. In all but one deal, it retained a management or marketing role.
     “Banks have great respect for him and banks need him,”
said Donald Trump, the New York celebrity developer who licensed his name to Perez for the Trump Hollywood. “They’ll make a deal with Jorge whereas they wouldn’t make a deal with other people.”
     Perez’s reputation is so solid, Trump said, that lenders and investors work with him even though he was the biggest developer in the biggest condo bubble in the country. Related Group accounted for 5,500 of the 22,000 condos built in Miami’s central business district from 2003 to 2008, with pre- construction prices doubling or tripling as speculators traded units like stocks, said Jack McCabe, a real estate consultant in Deerfield Beach, Florida.
     “He’s one of the faces of the boom-bust cycle that resulted in the great recession,” McCabe said. “He’s also one of the real geniuses, because he’s been able to stay in business.”

                        Back to Investing

     As Florida struggles to recover, Related Group, which has built or managed more than 77,000 housing units in the U.S. and Latin America, is investing again. Perez said he’s using government financing to build affordable housing in Florida’s Miami-Dade and Orange counties. He bought shopping malls in Phoenix and Birmingham, Alabama.
     He returned last week from India, where he’s an investor in a partnership to build middle-class housing in Amritsar, Udaipur, Lucknow, Coimbatore and Bangalore. And he hasn’t given up on his dream of Miami as a tropical Manhattan, though he said it will take at least three years before the market is ready for more high-rise condos.
     “If you went to a lender and asked for financing on a condo, they’d either laugh so hard that they’d die or they’d shoot you right on the spot,” he said during the earlier interview in his office.

                      Early to Restructure

     By reaching out-of-court agreements with lenders, Related Group was able to accelerate its recovery and turn to new projects, said Troy Taylor, president of the Algon Group, an Atlanta investment bank that advised Perez on restructuring.
     “He put his dirty laundry behind him,” Taylor said in a telephone interview. “There are other developers who can’t focus on opportunities because they are still cleaning up their problems.”
     Unlike many developers, Perez confronted his troubled projects while he still had some negotiating leverage, Taylor said. Related Group booked $1 billion in impairments in 2008, said Matt Allen, its chief operating officer, as condo buyers walked away from their deposits and lenders balked at financing amid falling prices. In January 2009, the company invited representatives from seven loan syndicates to a conference room at the Hilton Miami Downtown, where Perez presented a plan for a comprehensive workout.
     “I had 80 lenders, from all over the world, and each one of them could say no,” Perez said.
     They all said no, at first.

                        Losing Everything

     Perez said that as a boy of 10 in Cuba he learned that forces beyond his power could shape his destiny. His father owned a pharmaceutical company and the family lived in a Havana home staffed by maids and a chauffeur, a lifestyle that ended with the 1959 revolution led by Fidel Castro. As the Perez family fled the country, he watched soldiers at the airport take his mother’s jewels, including the rings on her fingers.
     “My father left everything behind, every penny, and he had to start again,” Perez said. “I saw how things beyond your control could cause you to lose everything.”
     After finishing high school in Colombia, he moved to Miami to start community college, eventually earning a master’s degree in urban planning at the University of Michigan in 1976. After graduate school, he returned to work for the city of Miami, where he said he felt at home as a Latin American immigrant. He worked at the city’s planning department, followed by a job at Landauer Associates Inc., a real estate services firm. In 1979, when Perez was scouting for low-cost housing deals, he competed against a New Yorker named Stephen Ross, founder of Related Cos.

                      Disappearing Wealth

     “A woman working for the city of Miami said, ‘You guys should get together,’ ” Ross, 70, said in a telephone interview. “We both had the same passion.”
     Ross, whose company’s real estate portfolio is worth more than $15 billion, said he offered Perez 15 percent equity in Related’s Florida division. Over time, Perez’s share climbed to
75 percent, while Ross said he holds the other 25 percent.
     To survive the real estate crash that began in 2007, Related Group cut 300 of 600 employees. Perez sold the company’s Gulfstream III jet while retaining a share in a smaller Citation X. In 2008, Forbes listed Perez’s net worth as $1.3 billion.
Last year, he fell off the magazine’s billionaire’s list.
     “My income has suffered tremendously,” Perez said. “But I’m not worried where my next meal is coming from.”

                          Politics, Art

     Perez’s office shelves hold pictures of his family -- the father of four is now in his second marriage -- next to photos of the developer with Barack Obama, Hillary Clinton and Bill Clinton, whose presidential campaigns he supported. His collection of Latin American art includes works by masters such as Diego Rivera, Frida Kahlo and Fernando Botero. He donated
$1.25 million to the University of Miami’s Jorge M. Perez Architecture Center, which opened in 2005.
     Perez is also a vice chairman of the Ross-owned Miami Dolphins of the National Football League and attends home games in the owner’s box. Ross and Perez vacation together, yachting in the Mediterranean and skiing in Deer Valley Resort, Utah.
     “He became probably the best of friends,” Ross said. “He was there when most people would’ve left.”
     When a recession hit New York’s real estate market in the early 1990s, Ross said Perez helped Related Cos.
     “We were doing well in Florida,” Ross said. “Profits of that company carried us and we recapitalized.”

                         Loyal Partners

     In August, Ross and Dean Adler, co-founder of Lubert-Adler Partners LP, a Philadelphia-based private-equity firm, won a bid on a $157 million construction loan held by Bank of America Corp. on the Oasis Fort Myers, twin 32-story towers developed by Perez where sales collapsed. After the auction, Ross and Adler, a partner of Perez in a $1 billion distressed real estate fund, turned management and sales responsibility back to Perez.
     “We felt Perez and his organization were the superior team,” said Adler, who declined to disclose how much he paid for the Oasis note. “I’d rather team up with a group that has significant experience. It’s not necessarily Related’s fault the market turned.”
     Shirley Norton, a Bank of America spokeswoman in San Francisco, declined to comment on the Oasis deal.
     Related Group continued to run sales and management at City Place South, a 420-unit condo building in West Palm Beach, Florida, after reaching a “friendly foreclosure” agreement in July 2009 with a seven-bank syndicate led by Scotia Capital Inc., which was owed about $119 million on the 20-story tower.
On Nov. 9, the noteholders sold City Place South’s last 305 units in a bulk deal for $64 million to Gulfstream Capital Partners LLC, a closely held firm in Dallas. Gulfstream hasn’t decided whether Related Group will continue to play a role at the property, managing partner Frank Howard Jr. said in a Nov.
17 interview.

                        Icon of Collapse

     Perez’s office window faces south toward the high-rise condos he built along Brickell Avenue. Among the tallest are the 57-floor Icon Brickell towers, a $1 billion condo and hotel project that embodied Related Group’s highest aspirations and biggest failure. Designed by Miami architectural firm Arquitectonica International Corp., the complex includes a 150- room Viceroy Hotel, pillars resembling the stone heads of Easter Island and a 28,000-square-foot (8,530-square-meter) spa. Three rooftop pools stretch 300 feet end to end.
     More than 90 percent of the Icon’s 1,650 condos were under contract, with 20 percent deposits, before the September 2008 opening, Perez said. Nine months later, just three dozen units had closed.
     “When you sell a building 90 percent, with 20 percent deposits, you play every scenario,” Perez said. “What if 10 percent walk away? What if 20 percent? And then we went to 50 percent. People say nobody’s walking away like that. Then we have 90 percent of the people that walk.”

                          Equity Lost

     Perez invested $5 million to start the Icon Brickell in 2004, financing construction through a combination of bank loans and buyers’ deposits. After sales stalled, he paid $100 million out of his own pocket to honor personal guarantees on the Icon’s construction bonds, he said.
     “All those methods of leverage for which people said, ‘My God, what a genius,’ ” Perez said. “Now people say ‘My God, what an idiot.’ ”
     In May, he reached an agreement with a syndicate led by HSBC Plc on a $482 million note on two Icon towers. While he retained management of the property, he surrendered his equity and lost his marketing role to Fortune International Realty.

                    ‘Timing, Timing, Timing’

     “He could have fought and the value of the asset would’ve been depleted by the fight,” said Edgardo Defortuna, president and founder of Miami-based Fortune International. “Jorge is more interested in seeing that, at least, this isn’t perceived to be a failure.”
     Juanita Gutierrez, a spokeswoman for HSBC in New York, declined to comment.
     Since Defortuna took over in May, 296 of the two towers’
1,273 units have closed at prices as low as $300 a square foot, half of the original asking price. Another 486 units are unsold.
     “A place like this, the profits could be awesome, but it came along at the wrong time,” Defortuna said, sitting in the Icon’s movie-screening room during a party to cross-promote condos with Versace fashions that featured models wearing purple chinchilla coats priced at $90,840.
     “Before, the saying in real estate was location, location, location,” Defortuna said. “It has to be replaced by timing, timing, timing.”

                        Florida History

     In October, after a Bank of America-led group with a $175 million construction loan agreed to restructure payments, Related Group retained ownership and management of the Icon’s third tower, which includes the hotel. By last week, sales had closed on 290 of the 372 condos in the tower, after prices fell to as little as $325 a square foot, said Barbara Salk, a Related Group senior vice president. Before the bust, asking prices were as high as $600 a square foot.
     Developers have been making and losing fortunes on Florida real estate for 90 years, said Neisen Kasdin, an attorney who is vice chairman of Miami’s Downtown Development Authority and a former Miami Beach mayor. Carl G. Fisher, the auto pioneer who developed Miami Beach in the 1920s, saw his fortune swell until 1926, when speculative property flippers ran out of new buyers.
George E. Merrick, developer of Coral Gables, lost his fortune in the Great Depression.
     “This is very much in the history of Florida development, visionaries who overextended themselves,” Kasdin said. “As smart as Jorge is, there might have been an element of over confidence.”
     Perez is confident he will build again.
     “We’re still managing to buy assets, affordable housing, market-rate rental housing,” he said. “We’re increasing the size of the management company, being advisers to other people in real estate and doing things that allow us to survive and hopefully prosper.”

                      Current Developments

     Florida projects in various stages include an affordable- housing rehabilitation project in Orlando, construction of market-rate homes in the city of Plantation and more residences around marinas in West Palm Beach and Fort Lauderdale, he said.
Sites on Las Olas Boulevard in downtown Fort Lauderdale and off Brickell Avenue in Miami will see more high-rise condos -- when the market is ready, he said.
     The financing will come, Perez said, because he treated investors and lenders fairly during the worst real estate bust in his life.
     “We never walked away from anything,” he said. “Now we’re debt free. We’re a very strong company now.”