Previous Columns
9:00 AM EST, Tuesday, January 6, 2009: Todd loves DXO, double long oil, because he thinks oil is going up soon. He also loves the ProShares UltraShort Lehman 20+ Year Treasury (TBT) that is twice (200%) the inverse (opposite) of the the Lehman Brothers 20+ Year U.S. Treasury Index. Here's the story: Recently, there's been an artificial "flight to quality, i.e. panic buying of treasuries. The price of treasuries has gone up and the yields have come down.

Todd believes, one of two things will happen;

+ The economy will stabilize and today's bubble on treasuries will burst. Prices will fall. Yields will come more normal. Already we see a little of this. Yields have gone from 2.30% to 2.55% in the past couple of weeks. Todd believes the 20-year treasury will go back to 4%

+ If the economy doesn't stabilize, the Feds will print even more money. There'll be monstrous liquidity and yields will skyrocket. Treasury prices will fall.

I put these ideas to you. I have two personal problems: I don't trust ProShares EFTs any longer, especially the ultrashort ones. And I seem to have lost my taste for gambling at present.

Risk cannot be measured. The long cover story of this weekend's New York Times magazine section was on Risk.

The article began:

"The story that I have to tell is marked all the way through by a persistent tension between those who assert that the best decisions are based on quantification and numbers, determined by the patterns of the past, and those who base their decisions on more subjective degrees of belief about the uncertain future. This is a controversy that has never been resolved.’

— FROM THE INTRODUCTION TO ‘‘AGAINST THE GODS: THE REMARKABLE STORY OF RISK,’’ BY PETER L. BERNSTEIN

Yikes. Automakers suffer. Chrysler's U.S. December sales fell 53%. Everyone is doing poorly, but some less worse than others:

• Toyota U.S. deliveries down 37% percent;

• Honda fell 35%;

• Ford Motor fell 32%

• Nissan was down 31%.;

• Mercedes-Benz was off 24%

• Audi sales fell 9.3%

• BMW sales fell 36%

• Subaru sales were down 7.7%; (We have three Subaru Outbacks in the family and absolutely love them.)

• Volkswagen AG said its December sales fell 14%;

• This was the worst annual volume since 1992;

• 2008 will be the first year in which the U.S. automakers' combined market share was less than 50%;

• This was the first drop in sales for Japanese automakers for Toyota since (1995) and Honda (1993);

Mexico's problem: From son, Michael on boondoggle, "You can really feel the recession here in Mexico. Tons of people coming back from lack of work in the US. Remittances, which make up 35% of the Oaxacan economy, were down 11% last month. Fewer tourists, too.

Maybe our recession will solve our illegal immigration "problem"?

Once a crook, always a crook. Assistant United States attorney Marc O. Litt said Bernie Madoff had mailed packages of valuables to his sons, his brother and his friends. By sending the packages containing stuff worth over $1 million, Mr. Madoff violated the terms of his bail agreement, which barred him from disposing of any assets, Mr. Litt said.

Just about everybody got wrong-footed by 2008, but some forecasts were spectacularly off the mark. In no particular order, here are 10 of the worst predictions.

1. "A very powerful and durable rally is in the works. But it may need another couple of days to lift off. Hold the fort and keep the faith!" -- Richard Band, editor, Profitable Investing Letter, Mar. 27, 2008

At the time of the prediction, the Dow Jones industrial average was at 12,300. By late December it was at 8500.

2. AIG "could have huge gains in the second quarter." -- Bijan Moazami, analyst, Friedman, Billings, Ramsey, May 9, 2008

AIG wound up losing $5 billion in that quarter and $25 billion in the next. It was taken over in September by the U.S. government, which will spend or lend $150 billion to keep it afloat.

3. "Freddie Mac and Fannie Mae are fundamentally sound.... I think they are in good shape going forward." -- Barney Frank (D-Mass.), House Financial Services Committee Chairman, July 14, 2008

Two months later, the government forced the mortgage giants into conservatorships.

4. "I'm not an economist, but I do believe that we're growing." -- President George W. Bush, July 15, 2008

Nope. GDP shrank at a 0.5% annual rate in the July-September quarter. On Dec. 1, the National Bureau of Economic Research declared that a recession had begun in December 2007.

5. "I think Bob Steel's the one guy I trust to turn this bank around, which is why I've told you on weakness to buy Wachovia" -- Jim Cramer, CNBC commentator, Sept. 15, 2008

Two weeks later, Wachovia nearly failed as depositors fled. CEO Steel eventually agreed to a takeover by Wells Fargo. Wachovia shares lost half their value from Sept. 15 to Dec. 29.

6. "Existing-Home Sales to Trend Up in 2008" -- Headline of a National Association of Realtors press release, Dec. 9, 2007

On Dec. 23, 2008, the group said November sales were down 11% from a year earlier in the worst housing slump since the Great Depression.

7. "I think you'll see $150 a barrel [of oil] by the end of the year." -- T. Boone Pickens, June 20, 2008

Oil was then around $135 a barrel. By late December it was around $40.

8. "I expect there will be some failures.... I don't anticipate any serious problems of that sort among the large internationally active banks." -- Ben Bernanke, Federal Reserve Chairman, Feb. 28, 2008

In September, Washington Mutual became the largest financial institution in U.S. history to fail. Citigroup needed an even bigger rescue in November.

9. "In today's regulatory environment, it's virtually impossible to violate rules." -- Bernard Madoff, money manager, Oct. 20, 2007

On Dec. 11, Madoff was arrested for allegedly running a Ponzi scheme that may have cost investors $50 billion.

10. "There's growing evidence that parts of the debt markets...are coming back to life." -- Peter Coy and Mara Der Hovanesian, BusinessWeek, Oct. 1, 2007

Oops.

Commercial office space is suffering. High unemployment means less demand for office space. If you bought an office building in recent years with 75% borrowing, i.e. you put down 25% and your office building has now fallen 26% in value (not uncommon), your entire equity is wiped out. This is from yesterday's New York Times.

January 5, 2009
As Vacant Office Space Grows, So Does Lenders’ Crisis
By CHARLES V. BAGLI

Vacancy rates in office buildings exceed 10 percent in virtually every major city in the country and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for troubled lenders.

With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. The Urban Land Institute predicts 2009 will be the worst year for the commercial real estate market “since the wrenching 1991-1992 industry depression.”

Banks and other financial companies have not had the problems with commercial properties in this recession that they have had with residential properties. But many building owners, while struggling with more vacancies and less rental income, will need to refinance commercial mortgages this year.

The persistent chill in lending from banks to the credit markets will make that difficult — even for borrowers who are current on their payments — setting the stage for loan defaults.

The prospect bodes ill for banks, along with pension funds, insurance companies, hedge funds and others holding the loans or pieces of them that were packaged and sold as securities.

Jeffrey DeBoer, chief executive of the Real Estate Roundtable, a lobbying group in Washington, is asking for government assistance for his industry and warns of the potential impact of defaults. “Each one by itself is not significant,” he said, “but the cumulative effect will put tremendous stress on the financial sector.”

Stock analysts say commercial real estate is the next ticking time bomb for banks, which have already received hundreds of billions of dollars in capital and other assistance from the federal government. Big banks — like Bank of America, JPMorgan Chase and Morgan Stanley — each hold tens of billions of dollars in commercial real estate securities. The banks also invested directly in properties.

Regional banks may be an even bigger concern. In the last decade, they barreled their way into commercial real estate lending after being elbowed out of the credit card and consumer mortgage business by national players. The proportion of their lending that is in commercial real estate has nearly doubled in the last six years, according to government data.

Just as home loans were pooled, then carved up and sold to investors as securities over the last two decades, commercial property loans were repackaged for the financial markets. In 2006 and 2007, nearly 60 percent of commercial property loans were turned into securities, according to Trepp, a research firm that tracks mortgage-backed securities.

Now that the market for those securities has dried up, borrowers cannot easily roll over the loans that are coming due.

Many commercial property owners will face a dilemma similar to that of today’s homeowners who cannot easily get mortgage relief because their loans were sliced and sold to many different parties. There often is not a single entity with whom to negotiate, because investors have different interests.

By many accounts, building owners have been caught off guard by how quickly the market has deteriorated in recent weeks.

Rising vacancy rates were expected in Orange County, Calif., a center of the subprime mortgage crisis, and New York, where the now shrinking financial industry dominates office space. But vacancies are also suddenly climbing in Houston and Dallas, which had been shielded from the economic downturn until recently by skyrocketing oil prices and expanding energy businesses. In Chicago, brokers say demand has dried up just as new office towers are nearing completion.

“The economic recession is so widespread that we believe virtually every market in the country will see a rise in vacancy rates of between 2 and 5 percentage points by mid-2009,” said Bill Goade, chief executive of CresaPartners, which advises corporations on leasing and buying office space.

There is no relief in sight for Orange County, where subprime lenders and title companies once dominated the market but are now shedding space because their business has dried up, and big banks are now shrinking because of a wave of mergers. The vacancy rate has soared from 7 percent at the end of 2006 to 18 percent, a rate that the Tampa area should match this month, local real estate brokers say.

In New York, where rents had risen the highest as financial companies gobbled up office space, vacancy rates are floating above 10 percent for the first time in years.

What looked like the worst possible case a few weeks ago for Chicago now appears to be the most likely outcome, said Bill Rogers, a managing director at Jones Lang LaSalle, a real estate broker. The vacancy rate, which was fairly stable at 10 percent, is now rising quickly and could hit 17 percent in 2009, he said. “A lot of companies are trying to shed excess space ahead of what is expected to be a worse market in 2009,” Mr. Rogers said.

Newmark Knight Frank, a real estate broker, expects the vacancy rate in Dallas to rise to 19 percent this year, from 16.3 percent.

Houston, like Dallas, held up while many other cities were showing the strains of an economic slowdown. But job growth and the brisk business of oil and gas exploration have come to an abrupt halt.

Vacant or unfinished shopping centers dot the highways. Among the 8.4 million square feet of office space under construction or recently completed in the metropolitan area, 80 percent has not been leased. As a result, the vacancy rate is 11 percent and rising.

“I see a wave of troubled assets coming out of Texas in the near future,” said Dan Fasulo, managing director of Real Capital Analytics, a real estate research firm.

Effective rents, after free rent and other landlord concessions, have already started to fall and are expected to decline 30 percent or more across the country from the euphoric days of the real estate boom, according to real estate brokers and analysts.

That is making it all the more difficult for owners, who projected ever-rising rents when they financed their office buildings, hotels, shopping centers and other commercial property. Owners typically pay only the interest on loans of 5, 7 or 10 years and refinance the big principal payments necessary when the loans come due.

Without new financing, owners will have few options other than to try to negotiate terms with their lenders or hand over the keys to banks and bondholders.

Among commercial properties, the most troubled have been hotels and shopping centers, where anemic sales and bankruptcies by retailers are leading to more vacancies and where heavily leveraged mall operators, like General Growth Properties and Centro, are under intense pressure to sell assets. But analysts are increasingly worried about the office market.

The Real Estate Roundtable sees a rising risk of default and foreclosure on an estimated $400 billion in commercial mortgages that come due this year. In recent weeks, a group led by the New York developer William Rudin has pleaded with Treasury Secretary Henry M. Paulson Jr., Senator Charles E. Schumer, Democrat of New York, and others to have the government include commercial real estate in a new $200 billion program intended to spur lending.

Mr. DeBoer, the roundtable’s leader, said building owners are by and large making their loan payments. It is the refinancing that is worrisome.

Most loans, he said, were made at 50 percent to 70 percent of property values. At the top of the market in 2006 and 2007, though, some owners took advantage of available credit and borrowed 90 percent or more of the value of a property, a strategy that works only in a rising market. Since then, property values have dropped 20 percent, Mr. DeBoer said.

Where possible, owners are trying to extend loans. A lender might agree to extend the term on a 10-year commercial mortgage, for example, if the borrower remains current on payments and can make an equity payment to compensate for the decline in the building’s value.

Already, $107 billion worth of office towers, shopping centers and hotels are in some form of distress, ranging from mortgage delinquency to foreclosure, according to a report by Real Capital Analytics.

New York, the biggest market by far, leads the pack with 268 troubled properties valued at $12 billion. But there are 19 more cities, including Atlanta, Denver and Seattle, with more than $1 billion worth of distressed commercial properties.

Analysts are especially concerned about buildings like 666 Fifth Avenue, One Park Avenue and the Riverton complex in New York, the Pacifica Tower in San Diego and the Sears Tower in Chicago, which were acquired in 2006 and 2007 with mortgage-backed financing based on future rents rather than existing income.

“Many of those buildings are basically underwater,” said Mr. Goade of CresaPartners. “The price they paid was too high to begin with. There’s no way anyone would lend that kind of money today.”

The best hat for cold weather: One morning last week t was 4 degrees fahrenheit. It was way below freezing. My mad bomber hat saved me. Highly recommended.

This is LLBean's $39.50 model. You can get cheaper versions, including $7 at your local gas station. But LLBean's is the warmest.

Man and bank.
A man walks into a bank, walks up to the mortgage manager and says, "I want a loan to buy a house. I am not sure what the house is worth, I have no down payment and I just lost my job."

The manager replies, "Sign right here."

Oh wait, this was supposed to be a joke.

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.