Real Estate Novella
Here is a wild article on Grubb & Ellis. Scott Peters has resigned as CEO, and Tony Thompson, who owns 13.9% of Grubb, has filed a complaint with the SEC about Grubb's recent poor performance. Grubb's stock is at three bucks, down nearly 80% since the Grubb & Ellis / NNN Realty reverse merger was announced just over a year ago. I (and am sure thousands) received a glowing marketing piece several weeks ago about Grubb's prospects - what a bunch of baloney. I am guessing broker / dealers will be reassessing their selling agreements.

Freddie, Fannie and Indy
I am trying to make sense of the collapse of IndyMac and the near collapse of Freddie Mac and Fannie Mae. This does not look good for the mortgage market. I don't see how the government can avoid saving Freddie and Fannie. I suspect it will be another long weekend on Wall Street and in Washington as capital is raised for Freddie and Fannie, and the Treasury and other regulators decide the extent of government's role.

The mortgage market, it seems to me, could get much worse than it is now. Housing prices have dropped and, I suspect, the mortgages causing problems for Fannie, Freddie and Indy are the most recent mortgages. With prices now at 2004 levels, the next wave of trouble will be the mortgages made earlier in the decade.

I would not be surprised by a national home saving plan to prevent a further meltdown of the housing market. Bill Gross (and I'm sure others) think the government needs to step in. Here is a blurb from his most recent newsletter, which was formed as an open letter to Obama with the assumption Obama is elected president:

In addition, you’ll need to provide some immediate relief to homeowners in the form of FHA (Federal Housing Administration) subsidies and low mortgage rate loans that somehow have been studied and studied in Congress for the past six months yet still haven’t been passed into law. By January, home prices will be down another 10 percent or so and our Japanese-style property deflation will be in full stride.

The newsletter assumes that congress will not act until January. The way things are moving, January may be too late for the economy.

TIC Article
Here is an article on a failed TIC program from today's Wall Street Journal. I thought the article was evenhanded. (I think the author got some of her figures wrong by confusing investor equity with the total price (debt plus equity) of the transaction.) The deal seemed doomed from the start, and it signified the type of deal that is going to get in trouble - i.e. deals to weak credits or deals that should not have been in a TIC structure. I had heard of this deal before today's article, and it has become the poster child of a deal gone bad in the TIC industry. It seems to me that the sponsor did a stand-up job in trying to help investors. One thing the article drives home, and at least the investor interviewed for the article seemed to understand, was that the TIC investment was real estate, not a bond, and in real estate when a tenant goes bankrupt it's not good, and when the property only has one tenant, it's bad.

Here is one part of a sentence that stood out to me:

All but one of the investors was over age 65

I don't this this is unique to the deal in the article.

Swift Energy
Below is a chart from the Wall Street Journal showing Swift Energy's (SFY) five-year stock performance - a rise of almost seven times. Swift used to syndicate oil and gas partnerships with the objective to provide steady income over a long period. Most, if not all, of these long-term oil and gas investments struggled to return investors' initial capital and produced inconsistent income. I have not checked their status lately, or even know if they are still in existence. (It'd be a nice story if somehow these deals were exchanged for SFY stock.)


You can bet that none of the investors in a Swift partnership made seven times their money over five years. To be fair to Swift, none of the oil and gas syndicators of the 1980s and 1990s had great deals. The oil and gas deals back then were viewed through a prism of their ability to return investor capital. This is a pitiful benchmark for success. The under performance of the oil and gas partnerships from the '80s and '90s offer a cautionary tale for today's investors scrambling for oil investments.

Cars and Oil
The oil companies and the auto industry are clearly moving in opposite directions. Oil hits new highs every day and GM is at lows not seen since the 1950s, and today closed below $10 per share. Exxon is near historic highs. Here is a chart showing the two stocks, GM since 1962 and Exxon since 1970:


You need to look no further than the period from 2000 to 2008 to know the interests of the auto makers and the oil companies are no long aligned. Ultimately this will be good for consumer and the auto makers. The United States is a car country, and Americans are going to drive cars. We will adapt to electric, hydrogen or whatever technology powers our cars. GM is leading the way with its new Volt. GM leading in a new technology seems surprising giving GM's stodgy reputation, but not when it's viewed in terms of its survival. I would not be shocked to see a reversal of recent stock performance - GM up and Exxon down - as viable car technology weans us off our reliance on oil. Of course GM has to survive for this to happen.

Interesting Way To Source Deals
Today I received a blast e-mail from a TIC sponsor looking for properties. It's interested in student housing and multi-family properties. I wonder if the sponsor got any response. Maybe another sponsor can off-load a couple of crap deals, because its obvious these guys are not the brightest stars in the sky. Besides the odd premise of the email, I was surprised that the sponsor wanted student housing. Several years ago many sponsors were lulled by the high cap rates of student housing apartments and have since found out why those cap rates were so high.

Sound Idea
Here is a post on the flat tax that makes sense. Every income classification needs to get taxed, whether its dividend income, capital gains or wages. I heard that Steve Forbes, under his tax plan, would not have to pay any taxes. If I get taxed, Steve Forbes gets taxed. The only deduction that should be kept is the deduction for interest on a home. If this was eliminated the price of home would drop by an amount that would approximate the deduction. This would be tough on a weak housing market.

United
I am a frequent traveller who has empathy with the airlines. With fuel at all-time highs I know profitability is tough. By the time many travellers get to their plane they are grumpy having had to endure added security checks and the general inconvenience of today's travel. Despite gloomy profit forecasts, I have only been on one flight in the past year that was not full (a late afternoon flight to Salt Lake City). Packed flights, limited service, reduced airline staff make for an unpleasent mix. Through all this the airlines, in my opinion, try hard.

Even with my empathy for the airlines, I try to avoid United. If this is not the worst US domestic airline, it has to be close. The seats that are not the upgraded coach are awful. They are so close together it is hard to do anything but listen to an iPod. Forget trying to work on a laptop or even read a newspaper, and if someone in the seat in front you puts the seat back all you can do is sit. Many United employees have had the bulk of their retirements wiped out over the past eight years and have to work out of necessity, which makes many surly. Now I read that United will require a stay over for its cheapest fares (on top of its me-too $15 per checked bag charge) starting in October. My empathy is turning to anger. I am not sure why this helps profitability. I try to schedule most of my business travel as one-day trips, and United is saying that it does not want this business. Well, I don't want United either.

Franchise Follies
Earlier this week, the Wall Street Journal had an article on struggling Cold Stone franchises. The story confirmed my suspicions about the dangers of franchises. The franchisees get locked into buying inflated supplies and equipment from the parent company that, in part, puts them into a financial bind. It's like those real estate infomercial schemes that are good for the sellers but bad for the buyers. I guess this is why two small ice creams at the Cold Stone nearest my house cost $10. I haven't been back since.

Fire Me - Please!
AIG's Ex-CEO Martin Sullivan to get $68 million.

Regional Delusions
Fifth Third Bank announced today that it is cutting its dividend and raising capital. Last week Key Corp made a similar announcement and Ohio's National City Corp made a made a similar announcement in April. I had thought that regional banks would fill some of the void in tenant in common financing caused by the mass exit of conduit lenders. The problems facing regional banks have squashed this notion. An informative presentation at the Orchard Conference confirmed that regional banks will not rush to the TIC space. Regional banks have a large exposure to residential developers, and the developers' problems are becoming the regional banks' problems. TIC sponsors need to look to other lending sources.

Orchard Update - Tony Thompson
I went to the Orchard Conference late last week. Orchard puts on a good meeting. I did not learn much from keynote speaker Tony Thompson. His speech was a ramble, with references to Martin Luther King, Thomas Edison, The Beatles and George Washington. (I wondered whether he secretly pictures himself with this pantheon.) I guess he is doing some sort of vulture fund, but more for troubled sponsors. Most real estate is not yet troubled (unless purchased in a frenzy in early 2007) and thinly capitalized sponsors are feeling the pinch more so than their deals. Development deals caught in the midst of the credit crisis are the exception and he has hired a development expert. I suspect the broker / dealer community will be hearing more detail from Tony's extensive organization soon.

Another One Bites The Dust
Martin Sullivan of AIG resigned over the weekend. Sub-prime mortgages are the gift that keeps giving - kinda like syphilis. This was a slow motion train wreck. His replacement, Robert Willumstad, has already extended an olive branch to Hank Greenberg.

Not Right
Disturbing article about people who own a home, then purposely buy new home and let the first home go into foreclosure. This is fraud. The people doing this probably think they are so smart that they have found a way to job the system, but my guess is that the banks will catch up soon enough. The people doing this are the same ones that were caught up in the housing frenzy and just had to buy a home regardless of cost, refinanced it multiple times and now have little equity. They were probably long-time renters, too, before they bought during the frenzy. Realtors that assist in this deception should be de-licensed, or whatever the real estate broker penalty is called. Shame on the realtors that say halting "buys and bails" will put more downward pressure on the housing market. These guys are idiot crack whores that need any transaction.

Windfall Tax
I just heard on NPR that Congress is debating a windfall tax on oil companies. I can't find an on-line reference. I hate high gas prices as much as the next guy as I drive a huge SUV. But a windfall tax is bad news. This is a knee-jerk reaction and populous politics. If Congress wants to do something, it needs to prod the White House and Fed to help bolster the dollar.

Update: Senate kills the windfall tax.

AIG Turmoil - Here Come The Smart Guys
I have posted before on my perception that AIG's brain power is not up to other top Wall Street firms. Here is a front page article in today's Wall Street Journal detailing the dissent of three top AIG shareholders - Eli Broad, Shelby Davis and Bill Miller. These three have no shortage of brain power and combined with Hank Greenberg, and I don't see AIG's current management team in place much longer.

Thompson - Poised for Big Things
I received a blast email from a TIC industry veteran who is joining Tony Thompson's new real estate venture, Thompson National Properties, LLC. I had heard he had started a boutique real estate firm and looked at the website. This is not boutique - the staffing is incredible. The website shows seventeen professional staff and twelve senior executives, including Thompson. This is amazing. I don't know his plans, but he is staffed to raise billions. He is the keynote speaker at the Orchard Securities conference I am attending this week, and I am interested to hear what he has to say. I like the fact that he is not resting on past successes and has dived head first back in to the business.

Priorities
Today was a wild financial day - the stock market dropped nearly 400 points, unemployment had its largest jump in 22 years, oil jumped 9% to nearly $140 per barrel, the dollar tanked and corn hit a record high. The White House's response (via the Wall Street Journal's Washington Wire blog) was as expected:

White House spokeswoman Dana Perino said the White House is considering options to address the slowdown, but didn’t offer specifics. At HUD, Bush renewed his calls for an increase in domestic energy production, permanent tax relief, and reform of the regulation of Fannie Mae and Freddie Mac.

“There are a range of things that we continue to look at, but at the moment we would ask Congress to act on the things we think would have an impact — not necessarily an immediate impact, but an impact, nonetheless, so that the future of our economy can continue to grow,” Perino said.

The tax cuts do not expire until the end of 2011, the third year of a McCain or Obama presidency. I want these tax cuts extended as well as the estate tax thresholds increased, but it is silly to think that an extension of the tax cuts would have any immediate economic impact. (How strange that the tax cuts were never made permanent with six years of Republican Congress.) If Bush wants to do something he should put an immediate end to ethanol subsidies and stop the charade of ethanol as a viable fuel alternative. A legitimate strong dollar policy would end the commodity surge and bring the cost of oil down, but it's probably too late for him to do anything effective for the dollar.

Stock Slump
Today, AIG's stock dropped to levels not seen since the summer of 1997. That's unfortunate.

Catching Cold
Soured residential loans keep increasing. All real estate is now a dirty word. I am still of the opinion that commercial real estate should fare OK despite the credit strains. So much money went to residential real estate that commercial did not get over built. If the economy really goes in the tank, my opinion will change.