Shulmaven Scoops Financial Times on Property Risks

 Shulmaven - March 18

* - Unfortunately there will be another shoe to drop. The value of office real estate has plummeted and those losses have yet to be recognized on the balance sheets of banks, CMBS', private equity, and pension funds. Along with bank stocks cratering last week, the shares of the office REIT's collapsed. See below for the price declines of a sample of office REIT's over the past year which are down 55%-71%.

Shulmaven: Random Thoughts on the Economy and the Stock Market - No. 4

Financial Times - March 23

Commercial property loans are joining deposit flight and bond portfolios as the biggest perceived risk for US banks as rattled investors fret about lenders’ strength following the collapses of Silicon Valley Bank and Signature Bank. Strains in the $5.6tn market for commercial real estate loans have deepened in recent months as the Federal Reserve’s year-long series of interest rate rises leads to sharply higher borrowing costs and weakening property valuations. Analysts fear any further reduction in lending — say, from businesses more keen on hoarding deposits following two shock bank runs in a week — could make a perilous situation worse.

Commercial property risks rise up bank investors’ worry list | Financial Times (ft.com)

My Amazon Review of Mark Asquino's "Spanish Connections:.........."

 A Diplomat’s Life

 

 Mark Asquino has written a memoir of his 40 year career working as an information officer and ultimately as an ambassador. I admire him for having the fortitude to write his memoir. I know all too well how hard it is  because I have 70 pages written for my own memoir that has been sitting as a word file for a very long time, but I digress.

 

Mark Asquino is a child of the gritty Providence Rhode Island of the 1950’s. According to stereotype an Italian kid there was not supposed to grow up to become an ambassador. The choice then, in a cartoon version, was for him to become either a priest, policeman/fireman or a member of the Mob. Nevertheless Asquino overcame the stereotype and graduated with honors from Brown University and went on to get a Ph.D. in literature there.

 

A teaching career was not for him and by a circuitous path he ended up working for the U.S. Information Agency. In short, he worked as public information officer for various embassies.  Among his better postings were in Spain, Venezuela, and Chile. However he served in post-Ceausescu Romania, Uzbekistan, Kazakhstan, Sudan, and finally Equatorial Guinea. Those postings could hardly be characterized  garden spots and in more than a few cases he faced imminent physical danger and he had to stand up to ruthless dictators.

 

Asquino made his bones in Uzbekistan where he was fortuitously stationed at the time of 9/11. After the 9/11 attacks Uzbekistan became a major base of operation for U.S. forces and as result it became a hotbed of political and journalistic activity. Of a sudden, Asquino became a real player. Indeed he was involved in the construction of a bridge into Afghanistan which he and his ambassador crossed over into that war torn country.

 

From there he moves up in the State Department and I learned that it takes quite a bit of lobbying for a career officer to gain an ambassadorship. Because of his interest in all things Spanish he ends up in Equatorial Guinea, which at one time was a Spanish colony. His description of this despotic country of 1.5 million people and lots of oil, makes one think of Donald Trump’s comments on certain African nations.

 

Asquino gets personal in writing about his parents, girlfriends, meeting his first wife and getting divorced. Much later, in Romania, he has middle-aged romance with Jane, a Peace Corps volunteer, who would become his wife.

 

In reading this book I got a strong sense of what life is like in the diplomatic trenches where nameless and faceless foreign service officers serve America every day. The public knows little of what they do, but their work is of the highest importance. I only wish the author had a better editor, because details are great, but too much detail can overwhelm the reader.

For the full Amazon URL see: A Diplomat's Life (amazon.com)

My Conversation with Ori Nir on the Situation in Israel

On March 19th I held a wide ranging conversation with Ori Nir, Vice President for Public Affairs at Americans for Peace Now on the situation in Israel. The discussion was sponsored by Temple Beth Shalom of Santa Fe and included the following topics:  Israel/Palestine, the proposed judicial reforms and religious pluralism. The link is below and starts about 3 minutes into the YouTube.

https://youtu.be/COqSE6osUZs

Random Thoughts on the Economy and the Stock Market - No. 4

*-The failure of the Silicon Valley Bank last week represents the first bank run of the 21st Century with deposits cascading out with a few clicks on a smart phone being egged on by social media. The Fed and the FDIC came to the rescue by insuring deposits over the $250k limit. This granting of super-deposit insurance was by my reckoning, a mistake. Instead, the FDIC should enforced small haircuts on deposits in excess of $250k. My take would be to offer 95% to those depositors who wanted their money immediately and issue for those who could wait, a one year zero coupon note priced at 95. This would still be a far better deal than one that would have been typical in a bank failure.

*- This episode represents a complete failure of the bank regulatory apparatus in that Silicon Valley's 86% deposit growth in a year represented an unmistakable yellow flag. Further, the bank invested those deposits in long duration assets which should have been viewed as a per se violation of safe and sound banking practice. That would have triggered either the closing of the bank or the firing of its officers. I can't wait to hear the testimony of the regulators from the FDIC, the San Francisco Fed and the State of California testifying before Congress.

* - Despite what Senator Elizabeth Warren said, the Silicon Valley Bank would have passed the stress test that it was exempted from. Why? As usual the Fed was fighting the last war by gearing their stress test to asset quality. Silicon's assets, by and large, were not subject to credit risk; instead they were subject to gigantic interest rate risk that the Fed to ignored. Chalk that up the Fed's zero interest rate policy that finally ended in early 2022.

*- As fears of a generalized run on the banking system catalyzed borrowings at the Fed's discount window surged to record $153 billion, up from $5 billion the prior week. An additional $143 billion was to guarantee the deposits of the three banks that recently failed and $12 billion was allocated to the Fed's new, and dubious, term lending facility.

* - The Fed's Open Market Committee meets this week and only 10 days ago market participants were anticipating a 50bp increase in the Fed Funds rate. Now the debate is whether the Fed will do 25 bps or nothing. There are good arguments on both sides, but my guess is that the Fed will copy the ECB and do a 25 bps increase and signal at least a temporary pause.

* - Unfortunately there will be another shoe to drop. The value of office real estate has plummeted and those losses have yet to be recognized on the balance sheets of banks, CMBS', private equity, and pension funds. Along with bank stocks cratering last week, the shares of the office REIT's collapsed. See below for the price declines of a sample of office REIT's over the past year which are down 55%-71%.

           REIT                                52- Week High         Current Price        % change

BXP (Boston Properties)                   133                           51                       -62%

Cousins Properties                               42                           19                       -55%

Douglas Emmett                                  35                           11                       -69%

Kilroy Realty                                       79                           29                       -63%

SL Green                                             84                            24                       -71%

Vornado Realty                                    47                           14                       -70%

* - As a result my guess is that the path of least resistance for stocks is lower with a retest of the October lows likely.

 

My Amazon Review of James Stewart's and Rachel Abrams' "Unscripted: The Epic Battle......"

Sex, Lies and a Boardroom Battle

 

James Stewart and Rachel Abrams have really written two books. The first is about the sexual proclivities of the media mogul and Viacom CEO Sumner Redstone and the second one is about the boardroom battle for the control of CBS which also involves the sexual proclivities of its CEO Leslie Moonves.

 

Sumner Redstone, a self-made billionaire, who in his 80’s has two live in paramours who try to take him for all he has got. The two paramours Sidney Holland and Manuela Herzer end up with over $150 million and almost succeeded in taking over his entire estate. They ultimately fail because Redstone’s estranged daughter Shari prevails in a legal fight to gain control over her father’s estate. The Redstone family seems to have put the “dys” into its dysfunctionality.

 

The second part of the book deals with Shari Redstone gaining control over CBS in an epic battle with Les Moonves. There are quite a few of boardroom machinations, but Moonves falls victim to the investigative reporting of the New Yorker’s Ronan Farrow. Moonves’ very aggressive behavior towards too many women finally caught up to him in the growing #MeToo climate. What is striking is that the CBS board was very nonchalant in dealing with all of the accusations facing Moonves. If Moonves didn’t mislead his board and its attorneys from the start, he just might have survived. Further all of the incidents discussed occurred prior to his becoming CEO of CBS. All of this corporate dysfunction is going on when CBS and Viacom should have been focusing on the competitive threat coming from streaming.

 

It is obvious that Shari Redstone talked the writers into adopting her view as to all that happened with her father and CBS. My guess is that her version of the events described are not quite accurate and she might be far from the aggrieved daughter depicted in the book.

 

Nevertheless, despite overdoing their view of “white male privilege” when they are really talking about the privileges of the very rich and powerful, Stewart and Abrams have brought us a behind the scenes of view of what can happen in the upper echelons of the media business.

For the full Amazon URL see: Sex, Lies and a Boardroom Battle (amazon.com)

Random Thoughts on the Economy and the Stock Market - No. 3

* Last week a black swan flew over the markets in the form of the failure of the Silicon Valley Bank (SIVB) with assets of $211 billion, making it the second largest bank failure in U.S. history. Although shorts were hovering over the stock for awhile, the suddenness of the collapse shocked the markets. The failure was the result of two cardinal sins of banking: 1) like an early 1980's S&L the yield on its assets were far below its funding cost due to the rapid rise in interest rates and 2) like the Texas banks of the 1980s its assets and deposits were concentrated in one industry; oil in the case of Texas and technology in this case.

Thus far, unlike in 1984 when the FDIC bailed out all of the creditors of the Continental Illinois National Bank, with $40 billion in assets and the it being the 7th largest bank in the U.S., Silicon Valley depositors above the $250k insurance threshold (87% of the deposits) will have to wait in line to get paid out of the receivership. Thus there are more than a few companies that will not be able to meet payroll. Just to note the Continental Illinois bailout gave rise to the term "too big to fail."

* The bank failure triggered a 4.5% weekly decline in the S&P 500 and the yield on two year Treasury notes cratered from 5.07% to 4.59% in two days, the biggest such decline since the Lehman crisis of 2008. As result the Fed will likely ignore the 311,000 February jobs gain accompanied by a modest 0.2% increase in average hourly wages and whatever this week's CPI will bring thereby ignoring the hawkish 50 basis point increase talk of the earlier last week. Thus,  making for a modest 25bps increase in the federal funds rate. Of course, if there is wide fallout from the bank failure any increase would be off the table.

* My sense is that banks stocks will continue to trade under pressure given the recent FDIC report highlighting the fact that the banking system was sitting with $620 billion in embedded securities losses as of yearend and the growing awareness on the part of depositors that the minimal rates banks now pay are unsustainable. Part of Silicon Valley's problem was that deposits were leaving to find higher yielding alternatives. Simply put, net interest margins will be under severe pressure.

*For the stock market as whole, as I wrote previously, I believe we will soon retest the October 3600 low for the S&P 500.   

My Amazon Review of Adam Hochschild's "American Midnight: The Great War..............."

Red Scare 1917-21

I thoroughly enjoyed Adam Hochschild’s book on the Spanish Civil War (See:Shulmaven: My Amazon Review of Adam Hochschild's "Spain in Our Hearts: Americans in the Spanish Civil War, 1936-1939"  ) and was very hopeful that his book on the crushing of civil liberties during and immediately after World War I would be as good. Unfortunately, I was disappointed. To be sure Hochschild does a very good job in covering the era, but I believe he over does it. It is one civil liberties violation after another with the evil Attorney General A. Mitchell Palmer and his Bureau of Investigation aide J. Edgar Hoover ferreting out socialists, Wobblies, communists, labor union organizers ad Black Americans coming home from the war. The author leaves no doubt in the reader’s mind that he is man of the Left.

It is too much and ignores the real scare that was facing Americans, the very deadly influenza pandemic. Simply put, his book lacks context and he leave out the fact that part of the fear of Bolshevism was based o the fact that Lenin and Trotsky took Russia out of the war to the very real detriment of the American soldiers arriving in France. Further he doesn’t go into detail about the breakup of socialist party into a socialist and a communist faction.

Nevertheless, I learned much from the book. Hochschild shows the full extent of press censorship accomplish by Postmaster General Albert Burleson. In those days magazines were distributed by mail and the postal authorities had the ability to suspend mailing privileges of any publication it deemed contrary to the Espionage Act.

I also learned of  Leo Wendell an accomplished government spy and provocateur entrenched deep in the labor movement. One of the leading red hunters of the day was the very anti-immigrant Senator Albert Johnson of the state of Washington. In 1924 he would go on to write the Johnson-Reed drastically restricting immigration.

Woodrow Wilson does nothing to stop the attacks on civil liberties and, in fact, he refuses to pardon of commute the sentence of Socialist Party leader Eugene Debs. It would take the election of Republican Warren Harding to commute Debs’ sentence many others. It was Harding who put an end the Red Scare.

One of the heroes in the book is Department of Labor official, Louis Post. He personally stopped a huge number of deportations and embarrassed Palmer before a congressional committee thereby hurting his presidential prospects.

In sum Hochschild has given us a sese of this sordid time in American history. However, it would have helped if spent more time on the lives of every day American were trying to live normal lives.

For the full Amazon URL see: Red Scare 1917-21 (amazon.com)