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.”