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Strategies & Market Trends : Classic TA Workplace

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To: Galirayo who wrote (162664)	2/24/2008 10:54:12 AM
From: robert b furman	Read Replies (1) of 209892

Hi Ray, We are in the process of building a new Chrysler Jeep Dodge dealership facility. We have been barraged by all of the local abnks _ WANTING THE Real Estate Loan. There is no shortage of liquidity - EXCEPT in the big money center banks that packaged and sold CDO's,SIV's,High leveraged loan's that aim to the hedge and private equity firms. Most banks never dabbled in thses areas. The mortgage originators sidestepped local banks (countrywides and many other small firms). The big banks have taken a hit and the yield curve has been reshaped to the steeper side. This is intentional per the Fed. The Fed wants profits in their member banks to supplement the sovereign funds recapitalization. The S&P is overweighted with Financials - it should be a laggard up until all of the CDO's and new inventions of parceled out money prove that they have corrected cash flow and that foreclosures won't take them down. From the best I can gather - these billions of writedowns have now been marked to model where the model is valueing 20 cents on the dollar. Even if the price paid was too much - just the real estate is worth 20 cents on the dollar.At liquidation foreclosures 20 cents on the dollar is low. There will come a day (with low rates - not as low as what they were in 06 and 07),but low compared to last summer,that smart buyers will be taking up the excess in real estate. Banks will have greater margins and the reality that people still must live somewhere(even if their house appraises for less than they paid) don't walk away from home - unless they are unemployed. Unemployment is still at historical low levels. What I have noticed is two bankers I know, have been touting credit swaps. Credit swaps lock in low interest rates for 3 - 7 years out. Of course with a real estate loan and a very large floor plan between our 4 dealerships - this could be huge. If rates continue to be pushed down by the fed,locking in a low rate for 3-5 years could be very profitable. I was surprised when my bank trader told me that the credit swap market made the teasury market look small. In 2003 record low interest rates could have been locked in @ the 3% rate. They don't think that will repeat,but if the fed keeps juicing the market,and the market doesn't want the debt and/or risk - rates may well get that low again. Right now the 5 year lock in rate they suggested was around 5.25 not very appealing. If the fed does drop rates another 100 basis points it could approach 4.00%-that's not a bad lock in for the real estate or a fraction of our floor plan. One can place GTC orders to lockin say 1-3 million dollars and do it in tranches.Once you lock it in that is what you must pay so it can help and also cut.Thus the tranch method to keep locking in cheaper money as and if rates decline. We are in an interesting time. I do not see any liquidity crisis except in wall street and big money banks. The fed has increased rates to the point where the risky CDO's have been tainted by foreclosure fears of what is an apparent decline in an overly frothed up real estate market. The tax free real estate business is in a secular decline.But then demographics will save it (along with lower rates). I believe the cost of money has made a significant jump up and it will stay there. 2006 and 2007 were historical peaks of cheap money for risky deals,be they subprime real esteate of private equity buy outs. If there is a next foot to fall - it will be the unwinding of many of the recent private equity deals.In the end the banks were the ones at risk holding this bag as well. The private equity boys had at risk the initial capital - but the leverage was at the beanks risk.This is why we're seeing the big banks walk away from those deals also. They just can't afford more writeoffs. This is why IF the monolines are being saved by a new plan next week- it is because the banks that stood in line for more writeoffs have ponied up the equity capital - somewhat at the expense of putting future private equities deals off the front burner. If they're doing any it will be strategic corporate cash deals and a much higher percent of equity vs lower leverage. All in all a very healthy deleveraging of the realestate and private equity bubbles. This in the not too long future will be viewed as very safe and conservative transition. The turnaround will be quick and very powerful. I still think we are in a mid cycle transition and if you subtract out what banks and some insurance companies have written off or better said "revalued" - most other companies are having very strong profits and huge cash hordes that put debt to cash at 20 year lows for the corporate sector. Look at an old stick in the mud mining company from Milwaukee Wisconsin - Bucyrus - there back log has exploded.They make huge open mine shovels.It takes a new mine to need one of these. New mines take years to start up. South Africa needs more electricity - nuclear plants take 10 years to build. We are just in the middle of a global expansion that has strained the infrastructure left from the 2001 recession. New projects are planned and committed for - they will continue as new markets (emerging) continue to created demand for greater supply of all goods and services. Liquidity will not impact the Russell smaller companies - there is more than ample liquidity.But it is being given to those who have assets to pledge. The difference is a much healthier and deleveraged world. These are all good things. It is hard not to let all the political BS not skew one's thinking - we get barraged by it constantly. The reality is either candidate won't be able to do much for all of the people they promised everything to. We as a people just don't have the money to give to a government that spends much too much as it is. JMHO and I'm off the week end fundamental soap box. Bob

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