Tuesday, June 20, 2017

In the Sacramento Bee, "Think rent is really high in California? Here's why it probably will get higher," June 19

“President Trump wants to keep people out by building a wall. California is more sophisticated – it uses zoning and development laws to keep people out, but they have the same effect,” Shulman said.

For the full article see, http://www.sacbee.com/news/politics-government/capitol-alert/article156864219.html

Read more here: http://www.sacbee.com/news/politics-government/capitol-alert/article156864219.html#storylink=cpy

Sunday, June 18, 2017

Amazon, Whole Foods and Shopping Center REITs

Amazon’s proposed takeover of Whole Foods sent shock waves through the grocery, packaged food and shopping center REIT industries. The instant judgement of the market was that the deal is very good for Amazon and bad for the three industries named. Seemingly oblivious to the true import of the deal were stock analysts who cover the REIT industry. To them the deal ratifies the value of what they characterize as high quality real estate. To be sure the 460 or so Whole Foods’ locations mostly sit on some of best shopping center real estate in the country, but that is a tiny segment of the industry.

Nevertheless that really misses the larger point. Amazon’s roll in life is to destroy the gross margins of its competitors. Thus if Amazon succeeds, and it doesn’t always, the 21% gross margin of supermarket operator Kroger will be a relic of the past. My guess is that under Amazon, Whole Foods’ industry high 35% gross margin will give way to something much lower. Although most analysts use sales/square foot as metric for rent paying ability, the true metric is gross margin/square foot and that is about to collapse for most food retailers. As a result rents will fall. Just think of all the grocery stores that will face pricing and market share pressures from the combined behemoth. Trust me, it is not going to be pretty and investors will soon find the safety they sought in grocery anchored centers to be illusory.

What Amazon appears to be doing is to link up the high income consumers who are Amazon Prime customers with the equivalent Whole Foods customer. In fact of all of the supermarket chains in America there is probably the greatest overlap between Whole Foods shoppers and Prime. Simply put Amazon wants to own the high income consumer which will make it easier for the Whole Foods customer to buy goods on Amazon Prime while shopping with the physical store becoming either a delivery point (where the customer takes physical delivery) or a distribution point (where the goods are shipped out to the customer). In essence Amazon will be placing its digitally sophisticated integrated global logistics capabilities at the service of the high income-time constrained consumer.


One last point, to the extent that Amazon will “own” the high income consumer it will be bad news for the operators of A+ regional malls.

Friday, June 16, 2017

My Amazon Review of Martha Gellhorn's "A Stricken Field: A Novel"

Obituary of a Democracy

Martha Gellhorn’s 1940 novel is not a great book, but an important one. Her book can be viewed as a novelized version of her December 10, 1938 Collier’s Weekly article entitled “Obituary of a Democracy” which described life in post-Munich Prague. Gellhorn arrived in Prague just after covering the Spanish Civil War where she established her reputation as a war reporter and was Ernest Hemingway’s lover. She would become his third wife in 1940 and go on to become one of the great war reporters of the 20th Century.

The novel’s protagonist is reporter Mary Douglas, Gellhorn’s alter ego if you will. She is there to cover the demoralization of Czechoslovakia after being sold out by England and France at Munich. As a result the Czechs surrendered the Sudetenland to Hitler. With that the Czech’s lost their defensible border with Germany and it became inevitable that the Germany would ultimately swallow up the heart of the country.

Mary Douglas notes the demoralization of the Czech Army which was not defeated in battle as the soldiers return home. It is one thing to lose a war; it is another to surrender without a fight. With the German occupation of the Sudetenland, Prague is flooded with refugees who join other fleeing Hitler from Germany and Austria. Among the Germans are two communists, Peter and Rita who Douglas befriends. Little did they know that their resistance to Hitler would soon be sold out by Stalin. Those two organize safe houses for the refugees but with European borders closed they are trapped when the Czech government orders them all home. Rita and Peter then go on the run and Peter would soon face a horrific torture by Gestapo agents operating with seeming impunity in Prague. Democracy is dying.


Gellhorn’s prose puts you in the place of the demoralized soldier, the struggling resistance and the hopeless refugee. In a way it is a lesson for our time.

For the Amazon URL see:

Thursday, June 8, 2017

An Open Letter to President Donald Trump: It’s Time to Go

I hate to break it to you, as one kid from Queens to another, it aint working. The trouble is that you are still acting like a 14 year old kid, not an adult much less a president. The American people know it, Congress knows it, your cabinet knows it, the White House staff knows it, Melania knows it and yes, Ivanka knows it.

Let’s face it you don’t understand our constitution and how our government functions under it. Your decision to fire F.B.I. Director Comey violated Lyndon Johnson’s rule with respect to J. Edgar Hoover. President Johnson understood that it was far better to have Hoover inside the tent pissin out rather than outside the tent pissin in. Put bluntly you are not up to the job and it is time for you to go before making an even bigger mess.

Your foreign policy is a wreck and is putting our country in grave danger. You have managed to give the middle finger to our European allies, Mexico, Canada and most of Asia. The only country in the world that seems to be happy with you is Russia, who under Putin is our enemy. Meantime with three carrier groups approaching Korea a real war looms. Do you really think you are up to this? Remember we are not talking about a real estate deal here. At home hardly anyone wants to work in your administrations as key positions remain unfilled. Further nothing is happening in Congress with no real progress being made on healthcare, tax reform and infrastructure legislation.

You can claim credit for appointing Neil Gorsuch to the Supreme, Court, the rollback of Obama-era regulations, bringing a much needed increase to defense spending and in rethinking our trade deals to better understand their impact on the American worker. So why don’t you claim victory, call it a day and leave. The country will be in good hands with Mike Pence.

Yours in making America great again,

David Shulman


Monday, June 5, 2017

My Amazon Review of Henry Hemming's "Agent M: The Lives and Spies of MI5's Maxwell Knight"

Inside MI5

Henry Hemming introduces us to Maxwell Knight a jazz playing naturalist with his own private menagerie who turns out to be a great talent spotter and spy runner for MI5. He is the model for Ian Fleming’s “M.” He marries three times, but none of them were consummated. In other words he was quite the quirky guy.

Hemming’s biography largely focuses on the 1920’s and 1930’s where Knight is recruited into a private spying operation that infiltrates the British fascisti. Knight is well suited for this because he largely sympathetic to their goals and was a firm anti-communist. There he meets William Joyce who would go on to become the pro-Nazi broadcaster Lord Haw-Haw in the 1940's.

When Knight formally joins MI5 his main focus is on Soviet espionage and its handmaiden the British Communist Party. There he pioneers the use of female agents and with the great work of Olga Gray he breaks a major Soviet spy ring that infiltrated the naval armaments industry. He stays focused on the Soviets until Italy invaded Ethiopia and then, and only then, does he wake up to the threat of fascism.

Hemming focuses on Knight’s successes, but Knight, despite suspecting Anthony Blunt, he completely misses the notorious Cambridge Five spy ring. He comes close to detecting the Soviet infiltration of the British nuclear program, but objectively he fails.


Hemming offers us great insight into the operations of MI5 and the life of one of its best agents. For those interested in this topic, though a bit long, his book is well worth the read. 




Monday, May 29, 2017

A New Look at Mall REIT Valuations: Part 2

Earlier this month I posted my view on how to approach mall REIT valuations given the stresses engendered by online competition. (See https://shulmaven.blogspot.com/2017/05/a-new-look-at-mall-reit-valuations.html) Since then the mall REITs drifted lower rallied and then fell back a bit. Nevertheless I believe that the burden of proof is on the bulls with the mall REITs continuing to trade at substantial discounts to Street net asset values. (See below) If the Street is right then back up the truck, but my question with the world still awash in a sea of liquidity, where are the sovereign wealth funds and private equity? This is especially true for GGP whose CEO all but announced the company is for sale and where Brookfield already owns 29% of the company. The silence, up to now, is deafening. Thus if private equity or sovereign wealth funds don't come in soon to scoop up the apparent bargain, the Street, as I argued, is way off.

REIT   Street   Market Price   Discount   Mkt. Cap.
             NAV                                              (in $bil)

SPG       214                 157             27%        50
GGP         32                  23              28           20
MAC        79                  59              25              8.5
TCO         95                  62              35              4

In my view sophisticated buyers understand two things. One, there is a structural revolution going on in retail as result of online commerce and two, the retail bankruptcies that we have seen this year will look like child's play during the next recession. Remember we are witnessing an onslaught of retail bankruptcies when income, consumption and employment data are relatively benign, what will happen when the economy turns more hostile.

As a result the clock is ticking. In the absence of a major deal or a portfolio sale/jv (a one-off transaction won't really count) over the next few months, Street estimates of net asset value will have to come down. As they say, time will tell.


Thursday, May 25, 2017

My Amazon Review of Richard Bookstaber's "The End of Theory: Financial Crises, the Failure of Economics and the Sweep of Human Interaction"

Stuff Happens

Richard Bookstaber a long time finance practitioner/risk manager who has worked for Morgan Stanley, Salomon Brothers, Moore Capital and Bridgewater as well as the Financial Stability Oversight Council and the Office of Financial Research has written a broad-based attack on financial economics and the DSGE models now used by most central banks. Trust me he knows what he is writing about and in the interests of full disclosure I interacted with him when I worked at Salomon Brothers.

Although not cited he is writing in the tradition of Nicholas Nassim Taleb (“The Black Swan”) with his fundamental disagreement with the theoretical underpinnings of financial economics. Simply put in a world of radical uncertainty we don’t know the underlying probability distributions of future financial returns and we don’t even know the potential states of the world needed to calculate a probability distribution. He argues that modern finance theory is built around top down axioms based on deductive reasoning where an all knowing representative individual calculates the future probabilities for all of the known states of the world. And importantly the future probability distribution is based on historical evidence. Under radical uncertainty that simply does not work.

Instead he argues for agent based models built upon inductive reasoning where the actors are “reflexive” in the word used by George Soros, in that they respond to the actions of others. As much as economists envy physics, Bookstaber turns the Heisenberg uncertainty principle on them. Thus while financial theory works in normal times, in a crisis all bets are off as “stuff happens.”

What Bookstaber would like is to use agent based models that are used to model automobile traffic and schools of fish, for example, through the use of complexity theory. All this is fine and good, but aside from a narrative Bookstaber does not offer up a formal model for the financial markets. Perhaps he has one, but it is not here. Nevertheless he offers a road map for future research.

At times Bookstaber’s writing style is clear and lucid with analogies from literature motion pictures and military combat. He is a student of “OODA”, observe, orient, decide and act. He is particularly acute in his discussion of the origins of the financial crisis and is highly critical of the role played by Goldman Sachs in their failure to honor a small “novation” request from Bear Stearns, which brought that firm down. However, at other times his writing is dull and staid


Bookstaber has written an important book and it should be read by risk managers and policy officials. The old models failed in 2008, now almost ten years later it is time for new ones.