The Dust Hasn’t Settled Just Yet

The Dust Hasn’t Settled Just Yet

Despite robust economic growth in the second half of last year and a more upbeat assessment for economic activity during the first part of 2010, the outlook for commercial real estate has not materially improved. Credit quality is still deteriorating as delinquencies and defaults increase. Operating fundamentals continue to decline. Vacancy rates across all property types have either already risen to record highs or appear set to. Lending standards remain exceptionally tight, and there has been very little progress made at clearing up the logjam of properties with maturing loans in the next few years, many of which are underwater or have seen loan-to-value (LTV) ratios skyrocket to levels that are difficult to refinance.

Federal Reserve Exit Strategy
Another important dynamic is the Federal Reserve’s exit strategy. The Fed is removing much of the quantitative easing that it put in place following the onset of the financial crisis. Quantitative measures, including direct purchases of $1.25 trillion in mortgage-backed securities helped contribute to a tightening in credit spreads.2 In addition, Fed Chairman Ben Bernanke stated the Federal Open Market Committee would soon raise the discount, rate returning it to its one-percentage point pre-crisis spread versus the Federal Funds rate.3 Higher interest rates look increasingly likely over the next few months, even if the Federal Funds rate remains unchanged. Higher rates may cause construction loan problems to surface sooner than they would otherwise and may place some additional downward pressure on property values, making it more difficult to refinance maturing loans.

Given the uncertainty surrounding what awaits the financial markets, investors and lenders are more likely to treat any glimmer of light as an approaching freight train rather than the light at the end of the tunnel. We expect vacancy rates, operating fundamentals and prices to deteriorate in coming months and look for sales to gradually increase as investors become more comfortable and accustomed to the new economic and regulatory environment.

FULL REPORT HERE

Afternoon Review

· Equity Levels: SP500 up 13.86pts to 1089.37 at 12:05PM. The Nasdaq is also up 23 pts to 2206.50. The Russell is up over 5 pts to 616 this morning.

· Equities out of the gate on a strong note today; Catalysts for the move higher: 1) M&A activity (SPG/General Growth and TRA/Yara were the big notable deals); 2) earnings received well (inc. Barclays, which had strong #s this morning in London, esp. from its BarCap division, but also out of MRK, GPC and Q in the US; DRI also had an upside preannouncement); 3) eco #s coming in better (the ZEW in Germany this morning and the Empire Survey from the US); 4) the Euro is finally bouncing, giving a strong bid to all things commodity-related today. On a technical basis, we traded north of 1081 on the sp500 (cash) and now people are watching to see if we can close north of 1090 (which is the 20day MA; we haven’t closed north of this level since Jan 20). Above 1090 looms the 50day MA at 1108. Stocks are drifting towards their highs of the day (so far) as Europe closes, a pattern we have seen over the last ~1-2 weeks (when Europe closes and the headlines around Greece and other sovereigns pass, US stocks seem to feel more comfortable rallying).

· Color from the desk – the tone to trading continues to be better; the heavy vanilla selling of earlier in Feb abated last week and that is carrying over into today. Buyers, which started to nibble late last week, present again today, esp. in some of the higher-beta groups. Still a lack of sellers (both shorts and vanillas) that is helping most although buyers def. more comfortable adding to long exposure. Note that while stocks have a nice bid today, corp credit is weaker (IG is slightly wider and HY is flattish).

· Equity Sectors – across the board rally today. Financials, tech, industrials, discretionary, energy, utilities, materials, and telecoms are all up >1%. Commodity-linked stocks among the best performing in the market (esp. steel stocks, which are higher on back of the weaker dollar and an AKS price hike). Tech is seeing buyers again ahead of a big Wed night of earnings (we get HPQ, AMAT, ADI, NTAP, and NVDA all Wed night); SOX is leading tech higher (SOX is up close to 2%). Financials trading inline w/the tape, led higher by asset managers, money center banks, and credit cards (COF master-trust came in better than expected). Health care and staples, both relative “safe havens”, are underperforming, although each of up 0.8% (within staples, KFT is off 2% post earnings, and WLP is leading HC lower after the co canceled its analyst meeting).

ALSO

Financials Update 02.16.10

Financials

· Financials: Trading in-line with the broader tape, financials are rallying on a series of headlines including Barclay's earnings, a cancelled strike from Greece's tax collectors, better-than-expected master trust data from the card companies and a NYTimes story stating that the EU is cooling to the Volcker Rules. Volumes are lighter, as are flows this morning. However, we maintain a bias to the buyside which we shifted towards mid-last week. Vanillas remain skewed to the buyside following two weeks of aggressive selling, while HFs remain better to buy as well following two weeks of a more balanced approach. For both vanillas and HFs, we're seeing them play a more positive directional bias after a more market-neutral approach over the past two weeks. In banks, we're seeing vanillas adding to positions in the money centers, and value buyers continuing to show a bid at a slight discount to the current market in the larger regionals. Small cap banks are better to buy as well, as we're seeing HFs cover shorts in these names. In the credit cards, we're seeing institutional buyers of the group as master trust continues to roll out. In insurance, we're seeing a buy-side bias from HFs.

· Asset managers – strength across the board in the group. JNS is leading the traditional names, up ~4%. AB, EB, CLMS, FII, IVZ, and WDR are all up ~2%+. The alternative managers also have a bid – BX, GLG, OZM, FIG are all up ~2%+.

· Banks – trading higher across the board. BAC and C are up ~2-3% and outperforming. Regionals are more mixed but also have a bid – FITB, MTB, MI, TCB, USB are some of the better performing regionals.

· Credit cards – COF is up more than 3% and outperforming after this morning’s master trust #s came in better-than-expected. AXP and DFS also have a bid to them.

· MI/financial guarantors – PMI is off 6% after earnings this morning came in below the St although the rest of the group is trading higher.

· Best Performing SP500 financials (from Bloomberg): JNS, COF, AIV, HCP, BAC, CBG, IVZ, C, ICE, ALL

· Weakest performing sp500 financials (from Bloomberg): BRK’b, LNC, TMK, AOC, ZION, NYX, FHN, CMA, MCO, BBT

HERE

Today’s Top Stories & Catalysts 02.15.10

Today’s Top Stories & Catalysts

· Europe being led higher by financials, which are seeing buy interest on back of Barclays’ stronger-than-expected earnings; most of Asia is closed for the Chinese New Year’s Holiday. On the eco data front, in Europe the German ZEW came in better and UK inflation was inline w/St. but above BoE’s target. In Japan, Q4 GDP #s (out Mon morning) came in higher than expected but the details were not as encouraging. Financials are strongest performing group in Europe on back of Barclays. On the downside, L’Oreal is off 5% and Intercontinental is down ~1%+ (both on earnings).

· Greece Update - Greek government bonds fell after Finance Minister George Papaconstantinou said his country is in a “terrible mess” and compared fixing the nation’s deficit to changing “the course of the Titanic”. Papaconstantinou said his country’s public sector “is out of control” as unions planned more strikes (Greek customs officials walked off the job Tuesday for a three-day strike to protest government austerity measures). The European Finance Ministers meeting commenced Mon and continues through Tues and will probably spend a lot of time discussing Greece although they aren’t expected to make specific announcements on precise aid mechanisms and procedures (similar to the EU Summit statement from last week); the next major event will prob. be mid-Mar, at which time the Greek gov’t’s progress towards achieving its budget goals will be evaluated. Eurogroup chairman Jean-Claude Juncker said Greece must do more to cut its budget and warned that other Eurozone citizens aren’t prepared to pay for its gov’t’s mistakes. ECB president Trichet said promises made last week by Greece and the 26 other European Union governments on finances and the stability of the euro area are “enough” for the time being. The NYT had a big pg 1 article this weekend discussing how “Wall Street”, inc. Goldman, helped Greece to hid the true extent of its debt accumulation w/currency swaps and other techniques; in response to the article, Brussels has given Greece two weeks to answer allegations in the Times article. London Times article Tues morning – “Bite the bullet. Kick Greece out of the euro”.

· Dubai – speculation of a proposed offering to creditors of Dubai World have spooked global markets and caused Dubai CDS spreads to blow out last week; according to speculation, Dubai World will offer creditors either 60 percent repayment over seven years and a government guarantee, or full repayment with a debt for equity swap for property assets of Nakheel and no guarantee. Dubai said on Sunday it had made no formal restructuring proposals and nothing was expected until March or April. CNBC

· MSFT – the co officially launched its new mobile OS, Windows Mobile 7, Mon morning; overall people seemed pleased w/the actual OS during demonstrations, although there is some concern around hardware partners – the co failed to unveil any major new hardware based on the OS. MSFT hopes to have devices w/Win7 Mobile on shelves for the holiday ’10 season. MSFT could have more to say on Win7 Mobile during its MIX conf in Mar.