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(Not so) Breaking News – US Commercial Real Estate problems on the Horizon?

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(Separating the news from the noise; or in the case of stocks the news is the noise or why a picture is worth a thousand dollars!)

 We’ve been on this theme for about six months and closely monitoring the Commercial Real Estate (IYR) and Regional Banks (IAT) ETFs and have recently updated our initial release (see Real Estate – Anybody Home earlier in the Blog).

 The News

 Bloomberg just released an article that points out the potential trouble in the Commercial Real Estate and Regional Banking arenas that have been known for some time but the charts are not reacting as ones gut may expect. Below we have noted some key points in today’s Bloomberg article:

 Losses on commercial real estate loans pose the biggest risk to U.S. banks this year, troubling smaller lenders while unlikely to threaten the entire financial system, U.S. bank examiners concluded during a review.

 Regional banks are almost four times more concentrated in commercial property loans than the nation’s biggest lenders, according to data compiled by Bloomberg on bailout recipients.

 Federal Reserve Governor Elizabeth Duke said in a Jan. 4 speech that credit conditions in commercial real estate “are particularly strained.”

  Fed Governor Daniel Tarullo cited commercial real estate as one of the “key trouble spots” in congressional testimony in October after the Fed stepped up a review of banks’ exposure to such loans.

 The default rate on commercial mortgages held by U.S. banks more than doubled to 3.4 percent in the third quarter, according to Real Estate Econometrics LLC, a property research firm in New York.

 Default rates in the first three quarters of 2009 have been the highest since 1993, according to the firm

 Italics Source: Bloomberg; January 4, 2010 Commercial Property is Biggest Risk, U.S. Bank Examiners Find

 The Chart


Things that make you go mmmm?

 Note how the regional banks (IAT) with all the attention and support that the entire financial is receiving and the economy improvements is at best moving sideways. Now look at commercial real estate and even with all the bad headlines the IYR continues to catch a bid and positively diverge from the regional bank’s trend.  Interesting as real estate data does point to a correlation between the economic recovery, slack in the employment numbers and the demand for retail shopping footprint and rates. So how is it that the higher highs and high lows continue? I believe that we need to “credit” (pun intended) the subtle and overt power and control that US policy makers have had influence over pricing or occupancy rates and levels.  The policy makers appear to be deeply involved and are using programs, policy and influence to encourage loan modifications and extensions in the hopes of staving off a massive commercial real estate and banking problem. While it looks like the banks are waiting for “the other shoe” to play out while commercial real estate has, for now, made its decision on the future.

 Gut Check/Chart Check.

 If your gut tells you something check the chart for confirmation as the ‘trend is your friend’ and sometimes your savior! That’s what we call separating the news form the noise where the news is the noise!

 Lesson reiterated – trust the gut? – yes, but confirm with the chart……wait for the support/resistance battle to play out.


Written by thehallmarketreport - Head on a Swivel

January 6, 2010 at 2:39 pm

Posted in Sector Surgery

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XRE – Capped RIET ETF – see article below

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Written by thehallmarketreport - Head on a Swivel

January 1, 2010 at 12:47 pm

Posted in Sector Surgery