Friday, November 28, 2008

Markets and The Next Shoe To Drop

I think I mentioned last week that Thanksgiving week is a historically volatile week when prices are pushed around on light volume. That has been the case this week as the news continues to be terrible, but stocks have continued to shoot up as sellers have been away visiting family.

The next month should be interesting. I think the trend has reversed a bit, but the sellers are getting ready to pounce again and year-end tax loss selling might create more volatility over the next month. It should be interesting.

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One of the most underreported stories is the midst of the credit crisis has been the tremendous amount of commercial real estate that was built with easy money in the past few years. Hotels, strip malls, condos, etc., were all built beyond demand because the money was there.

"It's a toxic drug and nobody knows how bad it's going to be," said Paul Miller, an analyst with Friedman, Billings, Ramsey, who was among the first to sound alarm bells in the residential market.

Unlike home mortgages, businesses don't pay their loans over 30 years. Commercial mortgages are usually written for five, seven or 10 years with big payments due at the end. About $20 billion will be due next year, covering everything from office and condo complexes to hotels and malls.

The retail outlook is particularly bad. Circuit City and Linens 'n Things have sought
bankruptcy protection. Home Depot, Sears, Ann Taylor and Foot Locker are closing stores.
Those retailers typically were paying rent that was expected to cover mortgage payments.


California, New York, Texas and Florida _ states with a high concentration of mortgages in the securities market, according to Fitch _ are particularly vulnerable. Texas and Florida are already seeing increased delinquencies and defaults, as are Michigan, Tennessee and Georgia."

Commercial real estate has been a huge boost to local tax revenues. If commercial real estate stumbles look for another round of pain for local governments.

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