Reggie's Blog & Proprietary Research

Reggie's Blog & Proprietary Research (1277)

Rising fiscal deficits and pending bond maturities due in 2010 are paving the way for the next wave of the Pan-European Sovereign Debt Crisis - Supply, potentially in excess of demand, which portends higher yields and more onerous debt servicing at a time of record fiscal spending!

Please read the following in sequence if you have not already done so for the requisite background to this post:

1.        Can China Control the "Side-Effects" of its Stimulus-Led Growth? Let's Look at the Facts - Explains the potential fallout of the excessive fiscal stimulus in China

2.        The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one.

3.        What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect

4.        The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. - attempts to illustrate the highly interdependent weaknesses in Europe's sovereign nations can effect even the perceived "stronger" nations.


Expected higher fiscal deficit and bond maturities due in 2010 have increased the need for bond auction financing for all major European economies.

Amongst all major European economies, France and Italy have the highest roll over debt due for 2010 of €281,585 million and €243,586 million, respectively.

From PR Newswire

Simon Property Group Makes $10 Billion Offer to Acquire General Growth Properties

Offer Provides 100% Cash Recovery Plus Accrued Interest To All Unsecured Creditors; Would Accelerate General Growth's Emergence From Bankruptcy

General Growth Shareholders Would Receive Value Exceeding $9.00 Per Share, Including $6.00 Per Share In Cash Plus Assets Valued At More Than $3.00 Per Share, While Avoiding Likely Dilution From Stand-Alone Recapitalization

Offer Supported By General Growth's Official Unsecured Creditor Committee

Acquisition of General Growth Portfolio By Best In Class Operator Offers Significant Value-Creation Opportunity For Simon Shareholders

Taubman Centers, Inc. 4Q09 results

TCO reported weak 4Q09 results with sagging core revenues and operating results. The rental income (minimum rents and percentage rents) declined 5.8% (y-o-y) to $92.5 mn from $98.2 mn in 4Q08. However, the decline in non-cash expenses like depreciation helped reduce the impact on bottom line from an accounting perspective with net income (excluding impairment charges and a litigation charge) declining lower 1.8% (y-o-y). Adjusted FFO which excludes the impact of non-cash items like deprecation declined 5.1% (y-o-y) to $76.6 mn from $80.8 mn in 4Q08.

Minimum rents declined 5.0% (y-o-y) to $87.1 mn from $91.6 mn in 4Q08. Average occupancy dipped to 89.5% from 90.5% in 4Q08 and average base rent declined 3.2% (y-o-y) to $42.56 PSF (per sq ft) from $43.96 PSF in 4Q08. While the tenant sales per square feet were reported to improve 3.8% (y-o-y), the percentage rents declined 17.1% (y-o-y) to $5.5 mn from $6.6 mn in 4Q08 largely owing to reduced occupancy and reduced percentage rents as % of mall tenant sales. Other revenues which include shopping centre related revenues and lease cancellation revenues dropped nearly 50% (y-o-y) to $8.4 mn from $16.8 mn in 4Q08 largely owing to negligible lease cancellation revenues of 0.5 mn against $7.5 mn in 4Q08. The decline in core revenues were offset by increase in management fees from Macao Studio City development fees as well as higher expense recoveries. Total revenues were down 1.9% (y-o-y) to $186.3 mn from $189.9 mn in 4Q08.


This is a trick question, for the fates of many European countries are now inextricably tied by what appears to be a poorly conceived methodology of handling diverse political and economic entities under a single currency without a truly authoritarian governing body. Basically, it's the old American saying, "Too many Chiefs and not enough Indians". If one member faces a harder landing, chances are that several others will follow. When I first started this series, a few pundits accused me of being sensationalist. I assume their weren't studying the numbers. It's funny how a few days can bring so many to your side of the table. Now it is becoming much clearer that this is more of a pan-European issue than a pan-Hellenic one.
The printer of the world's reserve currency had a problem selling debt. How well do you think the EMU members will be able to hawk their record trillions of (now apparently obvious to all) relatively stressed debt? Well, Europe's Economic Recovery Almost Stalls as Germany Unexpectedly Stagnates as the IMF Joins EU, ECB in Pledging Support for Greece. This is an extreme blow to the credibility of the Euro. Just a year ago, (silly) pundits were speculating that the Euro would replace the dollar as the world's reserve currency, and now the IMF is coming to a EMU members aid just has it has third world and emerging countries.

This is part 3 of my Pan-European Sovereign Debt Crisis Series. See The Coming Pan-European Soverign Debt Crisis and What Country is Next in the Coming Pan-European Sovereign Debt Crisis? for the first two parts.


Hat tip BoomBustBlogger Bill. It appears that the only one's who are actually ever chastised for defaulting on debt obligations are people. To think, some are still bullish on the banks.

Down to its last chance

Developers’ delays and funding woes spur the state to serve notice on Columbus Center, the $800m complex planned to span the Pike

(Boston Globe) Massachusetts transportation officials have begun severing ties with the developers of Columbus Center, the latest, and perhaps last, chapter in one of the most ambitious and controversial projects in Boston’s development history.

The state Department of Transportation yesterday told the project’s developers they are in default of their 99-year lease, after stalling on plans to build an $800 million complex above the Massachusetts Turnpike that would have united the Back Bay and South End neighborhoods.

The developers face termination of the lease not only because they have failed to complete construction, but because they have not properly maintained the property, said a top agency official. He asked that his name not be used because the default notice is not yet public.

Because of funding problems, the developers - the WinnCompanies and the California state pension fund, known as Calpers - stopped construction in April 2008 on the six-building complex of condominiums, hotel, stores, and parks on a massive deck over the highway. Since then, they have neither cleaned up nor secured the building site to the level the state has demanded, according to the transportation official with knowl edge of the situation.

UPDATED -It is beyond a hallucinogenic-induced pipe dream to even consider that the Eurozone will come out of this attempt at replicating the US "extend and pretend" policy intact and unscathed. The mere concept of global equity rallies should have macro traders and fundamental investors chomping at the bit. The US won't even get away with it, and we have the world's reserve currency printing press in our basement running with an ink-based, inter-cooled, twin-turbo supercharger strapped on that will make those German engineers green with envy, not to mention green with splattered printer ink as the presses go berserk!

In part 2 of my series on the Pan-European Sovereign Debt Crisis, we will review Italy and Ireland in comparison to the whipping child of the media - Greece (see "The Coming Pan-European Sovereign Debt Crisis" for part one covering Greece and Spain along with tear sheets for the Spanish banks at risk for subscribers).

Sunday, 07 February 2010 23:00

The Coming Pan-European Soverign Debt Crisis

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Banks are the epicenter of the economic crises that face the developed and emerging nations over the last few years. Many appear to have allowed the media to carry the conversation away from the banks and into sovereign debt issues, social unrest etc., but the main issue still resides in the banks. Why, you ask? Well, because every single major country conducts its finances through the banks and when those finances become stressed, the banks will be the first to show it and usually show it in an aggrieved manner since most banks are still highly leveraged.

The fact that governments worldwide have made the (generally unwise) attempt to bailout their big banks by transferring bad debts and liabilities from the private sector and bank investors to the public sector and taxpayers doesn't mean that the problem has been solved or even ameliorated. As a matter of fact, I believe the problem has now been amplified, for now we have effective increased the implicit leverage in the already excessively leveraged banking problems as well as removed the natural firewalls that may have been in place by having the problems in individual financial institution versus sitting on government balance sheets, able to affect all without the need of the "domino effect" that was feared from the Lehman collapse.

This leverage stems from the fact that most European sovereign nations are considerably "overbanked". The levered assets of the banks in many Euro-sovereign nations easily outstrip those nations' GDP's. So when the nations' banks get in trouble from bad banking practices (and a very large swath have), the nations themselves not only are helpless in attempting to truly save the banks (and instead only institute a bait and switch wherein private default risk/insolvency potential is swapped for public manifestations of the same), but are put at risk themselves for the bank is actually more of a sovereign entity than the sovereign is - at least from an economic footprint perspective. This is what happened in Iceland. If one were to take an empirical look at other nations in Europe, Iceland and Greece are merely the tip of the iceberg. I have warned about this over a year ago regarding Spain and the Spanish banks (see The Spanish Inquisition is About to Begin...), and now the chickens are coming home to roost.

As it stands now, we have the most developed nations suffering from indigestion after bailing out their oversized banking industry, with many of the allegedly balance sheet bailouts actually being illusory and liquidity-based in nature. The US is case in point here, since most banks still have untold hundreds of billions of dollars of losses still sitting on their balance sheets, and the US taxpayer is stuck with the equivalent of hundreds of billions of dollars in losses simultaneously. Accounting rules have been laxed to give the impression of record profits in lieu of what should be record losses.

We also have European countries such as the UK which has nationalized several of their largest banks, taking on significant losses on the taxpayer's balance sheet, but still facing the drag of a poorly performing banking system that is still too big for the economy as a whole. Just the non-performing assets of just the top banks in the UK amount to nearly 9% of their GDP! That is a very big chunk of dead money floating around in the system that literally invalidates X% of reported GDP. The UK also has nearly $200 billion of exposure to Ireland, whose bank's NPA's are roughly 6% of that naion's GDP, the second highest in all of Europe save the UK (who has the same problem)!

The smaller sovereign nations that failed to keep their hands on the fiscal and budget reigns during the global liquidity bubble are also facing issues. Greece is the current poster child for this scenario, having been downgraded by the ratings agencies, money and capital are fleeing from the country in a typical "run on the bank scenario", their debt being shunned by the markets with CDS exploding and the big market makers in their debt refusing accept their bonds as collateral. This is Lehman Brothers, part deux, which actually makes plenty of sense since the solution to the banks failing was the government taking the failing asset risk onto the balance sheets, hence now the governments are being seen as at risk of failing versus the backstopped private sector.

The larger sovereign nations are at risk of either having to bailout their less fortunate brethren or facing the fallout of having the repercussions of a domino effect reverberate across the EU and its major markets/counterparties. This goes deeper than some may suspect. For instance, the weakest sovereigns in the Euro area are still the central and eastern European nations, and the stronger sovereigns are heavily leveraged into these countries through their "overbanked" system. If (or when) these companies start to publicly exhibit cracks, quite possibly due to the domino effect of Portugal, Greece and Spain finally tipping, then you will find the Nordics showing stress through their banking system (the biggest CEE lenders) at a level that the countries may be hard pressed to backstop, for their banking systems are literally multiples of their GDPs.

I will attempt to illustrate the "Overbanked" argument and its ramifications for the mid-tier sovereign nations in detail below and over a series of additional posts.

Wednesday, 03 February 2010 23:00

Oxymoronic Statement of the Day

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In the media, sourced from CNBC:

"A sharp increase in the number of people giving up looking for work helped to depress the jobless rate. The number of 'discouraged job seekers' rose to 1.1 million in January from 734,000 a year ago."

 It is amazing how much people who should really know better, actually pay attention to this nonsense. This statement is akin to the bird is higher because it flies lower. The temperature is cooler since we have a 20 degree increase. 

Regardless of the economic vernacular deemed appropriate here, people who stopped looking for work and don't have a job are unemployed. Period! They ADD to the jobless rate, they don't detract from it. This is beyond common sense and it truly perturbs me when traders simply take a nominal number from a headline based upon academic nonsense and further distort an already distorted market with it. Rant engine is now offline.

 Bloomberg has an excellent interactive analysis on the potential for a near one million count revision upwards of the unemployment numbers. This combined with the work my team and I have put together should lead subscribers to believe that medium term, unemployment can exacerbate the global equity market decline. See "Are the Effects of Unemployment About To Shoot Through the Roof?" as excerpted below.

Tuesday, 02 February 2010 23:00

Note to CNBC Commentators

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One of the regular reporters on CNBC was comparing Greece to the subprime "crisis" of 2007, in that "investors" (I am sure that term is being used very loosely) are not going to make the same mistake as they did in 2007 by underestimating the "contagion" that subprime contained.

I feel compelled to correct him. There was no contagion from subprime. This is not a toxin nor infectious condition. The reason why many people missed the boat and failed to understand the speed of the spread of devaluation was because they failed to realize that the cause of the subprime drop was poor underwriting of loans. If anything was a contagion, it was the greed born from the ability to pass around risks that were poorly underwritten using other people's money. Read up on the entire history in my"Asset Securitization Crisis " series.

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