Housing Bubble Bursting?

[Randolph Kinney]

Dueling "Pipelines"

 

[Randolph Kinney]

McDowngrade: S&P Cuts 'Releveraging' Junk Food Vendor's Debt To Almost Junk

• *S&P LWRS MCDONALD'S RTG TO 'BBB+' ON SHR BUYBACK PLANS

McDonald's announced its intent to return an additional $10 billion to shareholders by the end of 2016, substantially funded by debt.

We are lowering the corporate credit rating to 'BBB+' from 'A-' since the company's various credit metrics will now be measurably worse than our previous expectations.

Our assumption is that debt to EBITDA will rise to the low- to mid-3x range during 2016-2017 versus around mid-2x previously.

The outlook is stable, reflecting our view that there will be continued progress in the U.S. and that credit metrics will not rise above 4x over the next two years as the company balances further share repurchases and a substantial dividend with the timing of success in the business turnaround.

• *MCDONALD'S BOOSTS HOLDERS CASH RETURN TARGET BY $10B OVER PRIOR
• *MCD SEES CASH RETURN TO HOLDERS ABOUT $30B 3 YR PERIOD END '16
• *MCDONALD'S: MAJORITY $10B OF CASH RETURN FUNDED BY ADDED DEBT
• *MCD SEES CAPEX DECLINING OVER TIME
• *MCD SEES RETURNING ALL FREE CASH TO INVESTORS IN THE LONG TERM

Can McDonald's afford a wage increase for its workers and share buybacks?

 

[Randolph Kinney]

Fed Trips over Eye-Popping Commercial Real Estate Bubble, Accidentally Looks, Sees “Early Signs” of “Search for Yield”

No one in his right mind plays in commercial real estate with their own money. Other people’s money is the key. Low interest rates make it happen. Banks are eager to lend. They repackage some of these loans into highly-rated Commercial Mortgage Backed Securities that yield-desperate investors are eager to gobble up, spreading the risk far and wide.

CMBS made the prior commercial real estate bubble possible, before it all blew up in 2008. And they’re making it possible now. When it doesn’t work out, as in 2008, it isn’t that much of a problem because other people’s capital gets destroyed.

And so prices have been bid up again over the years since the low of May 2009, and miracles have been performed after the crash, and construction cranes are dotting cities, and one of those forests of construction cranes must have triggered something funny in Boston Fed President Eric Rosengren. He opened his eyes and counted these cranes on a short walk in Boston, and for the first time saw what had been ballooning before him for years: a commercial real estate bubble.

He then veered into “financial stability considerations” and his crane-count moment:

A qualitative indicator in a major city is a simple crane count. When the number of cranes observed on a short walk in a city such as Boston reaches double digits, as is the case today, it is worth reflecting on the sustainability of such growth.

It has been one heck of a party in commercial real estate. The Green Street Commercial Property Price Index edged up to 120.6 in October, having nearly doubled from its crash-low in May 2009. It’s now 20.6% higher than it had been at the peak of the prior totally crazy bubble that blew up and collapsed with such spectacular financial pyrotechnics:



“Commercial property prices have increased 8% so far this year, and are on pace to equal the 10% appreciation that occurred in 2014,” the report pointed out. And this miracle happens in an economy that has been barely creeping higher:

But it is unclear how long that momentum can be sustained. When compared to yields available in the corporate bond market, today’s cap rates look low. The possibility of a modest decline in prices over the next year should not be ruled out.

Except, as the chart shows, there have been no “modest declines” on an annual basis this entire century. It’s intoxicating boom and terrifying bust.

The commercial real estate bubble and the associated mountain of loans and CMBS have reached such proportions that in September Fitch Ratings began to fret about them out loud.

It found that “the average Fitch loan to value (LTV) in 2007 was 110.7% right on top of the 110.3% thus far in 2015.” It worried about “weakening loan characteristics, declining underwriting quality, and concerns about originator, banker, and rating agency competition.” And it warned: “CMBS cannot afford a repeat of the 2008-2009 experience.”

The Fed, of course, has steadfastly refused to see any bubbles no matter how big and obvious they are until after they blow up and wreak havoc with other people’s money. But Rosengren is suddenly onto something novel, something no one at the Fed had ever thought about: that commercial property prices “have grown quite rapidly, despite the only modest growth in real GDP over the recovery.”

And so he mused about the costs of the Fed’s policies that are responsible for the bubble and the crash that invariably comes afterwards:

One potential cost of maintaining the federal funds rate at the zero lower bound for a long time is that it may incent behavior that would be discouraged in a more normalized interest rate environment. Looking forward, a potential risk of a low-interest rate environment is that investors seeking a higher return may take on too much risk in order to improve returns, perhaps not fully taking into account the higher risk that normally accompanies higher yields.

Early signs of this “search for yield” may be showing up in the commercial real estate market.

Which is hilarious. “Early signs!” See chart above.

Commercial real estate has been going haywire for years, whipped into frenzy by cheap money and yield-desperate investors, all a product of the Fed’s grand designs. So just now, Rosengren sees for the first time the forest of construction cranes and the soaring property prices, and maybe he’s even thinking about the debt that is piled on top of all this, the CMBS, the 110% LTV, and it’s all just the “early signs.” Which makes you wonder how big a bubble has to get before these folks realize it’s a bubble that will blow with the same or even more spectacular financial pyrotechnics as the last one.

http://wolfstreet.com/2015/11/10/fe...state-bubble-early-signs-of-search-for-yield/

Investors desperate for yield are taking on too much risk with too much debt. Say what? Didn't we see this before in the runup to 2008? And that did not end well.

 

[Meandering]

And once again they miss the point.

What is being built in the commercial sector?
Factories that will house decent paying jobs? No.
Schools for a declining child population? No.
Office buildings that will hold office employees with jobs that shipped to India? Maybe
Retail centers to sell things to a population with stagnant wages, increasing inflation and taxes? Yup
Hospitals that will service 40% +/- of it's patients who will pay with government subsidizes? Yup
Apartment buildings that will house those that can't buy/or won't buy a home? Yup
Warehouses that will hold more inventory supply? Yup

It's field of dreams building. Build it and they will come.
You have to have a very strong belief that everything is fine and going to get better, soon.

.

 

[Michael S]

Cap rates for single tenant net leased investments are just ridiculous at this point. Stuff that was trading at a 7% cap rate a couple of years ago is now at 5%-5.5%. The smaller deals (a few million or so) are almost entirely cash deals with 1031 exchange money. There's no debt because the cash on cash return for these deals just doesn't pencil out. For these investors they would rather overpay 10-15% than pay taxes on their capital gains. When cap rates go back up to 7% on that fast food restaurant they just bought at a 5.5% cap, and they lose 21% of their value those tax savings may not look so great.

One thing I've heard over and over the last couple of years from investors and brokers is that it's a great time to sell, but then what? Most people want to put that money back into real estate but they see there's nothing out there with a decent yield so they decide to just sit on their current property and not sell.

 

[Randolph Kinney]

California lost 9,000 business HQs and expansions, mostly to Texas, 7-year study says

Roughly 9,000 California companies moved their headquarters or diverted projects to out-of-state locations in the last seven years, and Texas has been a prime beneficiary of the Golden State’s “hostile” business environment.

That’s the conclusion of study by Joseph Vranich, a site selection consultant and president of Irvine-based Spectrum Location Solutions.

Of the 9,000 businesses that he estimates disinvested in California, some relocated completely while others kept their headquarters in California but targeted out-of-state locations for expansions, Vranich found. The report did not count instances of companies opening a new out-of-state facility to tap a growing market, an act unrelated to California’s business environment.

Japanese automaker Toyota, which is consolidating its North American headquarters in Plano, Texas, over the next couple of years, is one of those companies. The company is leaving Southern California and two other locations to set up shop in Plano, where it will employ 4,000.

It’s typical for companies leaving California to experience operating cost savings of 20 up to 35 percent, Vranich said. He said in an email to the Dallas Business Journal that he considers the results of the seven-year, 378-page study “astonishing.”

Here are some highlights:

• Texas ranked as the top state to which businesses migrated, followed in order by: Nevada, Arizona, Colorado, Washington, Oregon, North Carolina, Florida, Georgia and Virginia. Texas was the top destination for California companies each year during the seven-year study period.
• Metro areas benefiting from California disinvestment events, starting with those that gained the most, are: Austin-Round Rock-San Marcos, Dallas-Fort Worth-Arlington, Phoenix-Mesa-Scottsdale, Reno-Sparks, Las Vegas-Paradise, Portland-Vancouver (WA)-Hillsboro, Denver-Aurora-Lakewood, Seattle-Tacoma-Bellevue, Atlanta-Sandy Springs-Marietta and Salt Lake City tied with San Antonio.
• Broken down to the municipal level, the Top 15, starting with those that gained the most, are: Austin, Reno, Las Vegas, Seattle, Phoenix, Dallas, Portland, Ore., San Antonio, Denver, Scottsdale, Houston, Colorado Springs, Irving, Texas, Plano, Texas, Hillsboro, Ore., Fort Worth, Texas, Tempe, Ariz., Pittsburgh, Nashville, Salt Lake City, and Cary N.C.
• Los Angeles led the Top 15 California counties with the highest number of disinvestment events, followed by: Orange, Santa Clara, San Francisco, San Diego, Alameda, San Mateo, Ventura, Sacramento, Riverside, San Bernardino, Contra Costa, Santa Barbara, San Joaquin, Stanislaus and Sonoma.
• Companies continue to leave California because of rising costs and concerns over the state’s “hostile” business environment, according to the study, which also names companies and provides details of business disinvestments in the state.

http://www.bizjournals.com/sacramen...a-lost-9-000-business-hqs-and-expansions.html

Just wait until next year when more cap and trade taxes hit as well as the mandate for renewable energy comes on line.

 

[Randolph Kinney]

Record share of young women are living with their parents, relatives

A larger share of young women are living at home with their parents or other relatives than at any point since the 1940s.

A new Pew Research Center analysis of U.S. Census Bureau data shows that 36.4% of women ages 18 to 34 resided with family in 2014, mainly in the home of mom, dad or both. The result is a striking U-shaped curve for young women – and young men – indicating a return to the past, statistically speaking.

You’d have to go back 74 years to observe similar living arrangements among American young women. Young men, too, are increasingly living in the same situation, but unlike women their share hasn’t climbed to its level from 1940, the highest year on record. (Comparable data on living arrangements are not available from before then.)

Back in 1940, 36.2% of young women lived with their parents or relatives. That number dropped over the next couple of decades as marriage rates increased and women began joining the workforce in larger numbers, becoming financially able to live on their own.

Young adults were most likely to live independently of family around 1960, when just 24% stayed in the nest. But that figure modestly increased from 1960 to 2000 and then sharply increased after that, especially with the onset of the Great Recession in 2008. The labor market recovery since then has not reversed the trend – in fact, it’s become even more pronounced.

The reasons that more women today are living with mom and dad are far different from in the 1940s: Today’s young women are more likely to be college educated and unmarried than earlier generations of American women in their age group.

In the decade that brought the country into World War II, women typically lived with their parents until they married and only a small share attended college. Indeed, even in 1960, only 5% of 18- to 34-year-old women were college students. Today, women are five times more likely to be enrolled in college. According to 2014 figures, 27% of young women were college students.

College students – including those enrolled part-time and at community college – are significantly more likely to live with family than young adults who are not in college. In 2014, 45% of young females in college lived with family, compared with 33% of young females not in college.

Furthermore, while marriage typically promotes living independently of parents and other relatives, many young women are delaying marriage compared with earlier decades. In 2013, young women were half as likely to be married (30%) as young women in 1940 (62%). Census figures show that in 2014, the typical woman began her first marriage at age 27. In 1940, it was 21.5.

Remaining in the nest is also a trend for young men – in fact, even more so when compared with their female peers. Last year, 42.8% of young men lived with their family, a higher share than women but not one that surpasses the highest rates on record like the women’s share does.

In 1940, nearly half (47.5%) of male 18- to 34-year-olds lived with family. Why? It’s likely that the lingering effects of the Great Depression may have contributed to the high level of male co-residence with family. The national unemployment rate for those ages 14 and older in 1940 was nearly 15%. By comparison, the national unemployment rate (for those 16 years and older) peaked during the Great Recession at 9.6% in 2010.
http://www.pewresearch.org/fact-tan...omen-are-living-with-their-parents-relatives/

Economics and social liberation has its effect on the young. It does not bode well for housing.

 

[Randolph Kinney]

Energy Default Alarms Get Louder as Pain Seen Lasting Into 2016

• Oil slump may push junk default rate to four-year high
• 23 energy companies defaulted this year, Moody's says

Eleven months of depressed oil prices are threatening to topple more companies in the energy industry.

Four firms owing a combined $4.8 billion warned this week that they may be at the brink, with Penn Virginia Corp., Paragon Offshore Plc, Magnum Hunter Resources Corp. and Emerald Oil Inc. saying their auditors have expressed doubts that they can continue as going concerns. Falling oil prices are squeezing access to credit, they said. And everyone from Morgan Stanley to Goldman Sachs Group Inc. is predicting that energy prices won’t rebound anytime soon.

The industry is bracing for a wave of failures as investors that were stung by bets on an improving market earlier this year try to stay away from the sector. Barclays Plc analysts say that will cause the default rate among speculative-grade companies to double in the next year. Marathon Asset Management is predicting default rates among high-yield energy companies will balloon to as high as 25 percent cumulatively in the next two to three years if oil remains below $60 a barrel.

http://www.bloomberg.com/news/artic...rms-get-louder-as-pain-seen-lasting-into-2016

 

[TD Morgan]

When 20 million illegal residents are "asked" to go home (hopeful thinking), many will not be invited to return.

Hopefully this will lower the cost of housing (along with other costs) and we won't see "doubling up" out of economic desperation.

Record share of young women are living with their parents, relatives

A larger share of young women are living at home with their parents or other relatives than at any point since the 1940s.

A new Pew Research Center analysis of U.S. Census Bureau data shows that 36.4% of women ages 18 to 34 resided with family in 2014, mainly in the home of mom, dad or both. The result is a striking U-shaped curve for young women – and young men – indicating a return to the past, statistically speaking.

You’d have to go back 74 years to observe similar living arrangements among American young women. Young men, too, are increasingly living in the same situation, but unlike women their share hasn’t climbed to its level from 1940, the highest year on record. (Comparable data on living arrangements are not available from before then.)

Back in 1940, 36.2% of young women lived with their parents or relatives. That number dropped over the next couple of decades as marriage rates increased and women began joining the workforce in larger numbers, becoming financially able to live on their own.

Young adults were most likely to live independently of family around 1960, when just 24% stayed in the nest. But that figure modestly increased from 1960 to 2000 and then sharply increased after that, especially with the onset of the Great Recession in 2008. The labor market recovery since then has not reversed the trend – in fact, it’s become even more pronounced.

The reasons that more women today are living with mom and dad are far different from in the 1940s: Today’s young women are more likely to be college educated and unmarried than earlier generations of American women in their age group.

In the decade that brought the country into World War II, women typically lived with their parents until they married and only a small share attended college. Indeed, even in 1960, only 5% of 18- to 34-year-old women were college students. Today, women are five times more likely to be enrolled in college. According to 2014 figures, 27% of young women were college students.

College students – including those enrolled part-time and at community college – are significantly more likely to live with family than young adults who are not in college. In 2014, 45% of young females in college lived with family, compared with 33% of young females not in college.

Furthermore, while marriage typically promotes living independently of parents and other relatives, many young women are delaying marriage compared with earlier decades. In 2013, young women were half as likely to be married (30%) as young women in 1940 (62%). Census figures show that in 2014, the typical woman began her first marriage at age 27. In 1940, it was 21.5.

Remaining in the nest is also a trend for young men – in fact, even more so when compared with their female peers. Last year, 42.8% of young men lived with their family, a higher share than women but not one that surpasses the highest rates on record like the women’s share does.

In 1940, nearly half (47.5%) of male 18- to 34-year-olds lived with family. Why? It’s likely that the lingering effects of the Great Depression may have contributed to the high level of male co-residence with family. The national unemployment rate for those ages 14 and older in 1940 was nearly 15%. By comparison, the national unemployment rate (for those 16 years and older) peaked during the Great Recession at 9.6% in 2010.
http://www.pewresearch.org/fact-tan...omen-are-living-with-their-parents-relatives/

Economics and social liberation has its effect on the young. It does not bode well for housing.

 

[TD Morgan]

I bet these oil big wigs want us to cry for them.

When they succeed, they make enormous profits. When they fail, the cry for publicly-funded bailouts.

Based on my analysis of historic trends, gasoline should now be about $1.50 per gallon. I see that it is now on an uptick. I don't know of any economic support for this.

Sure, $0.50 per gallon may not "seem" like a lot, but it represents an overpricing of 33%.

Where is the price break for us little people?

Energy Default Alarms Get Louder as Pain Seen Lasting Into 2016

• Oil slump may push junk default rate to four-year high
• 23 energy companies defaulted this year, Moody's says

Eleven months of depressed oil prices are threatening to topple more companies in the energy industry.

Four firms owing a combined $4.8 billion warned this week that they may be at the brink, with Penn Virginia Corp., Paragon Offshore Plc, Magnum Hunter Resources Corp. and Emerald Oil Inc. saying their auditors have expressed doubts that they can continue as going concerns. Falling oil prices are squeezing access to credit, they said. And everyone from Morgan Stanley to Goldman Sachs Group Inc. is predicting that energy prices won’t rebound anytime soon.

The industry is bracing for a wave of failures as investors that were stung by bets on an improving market earlier this year try to stay away from the sector. Barclays Plc analysts say that will cause the default rate among speculative-grade companies to double in the next year. Marathon Asset Management is predicting default rates among high-yield energy companies will balloon to as high as 25 percent cumulatively in the next two to three years if oil remains below $60 a barrel.

http://www.bloomberg.com/news/artic...rms-get-louder-as-pain-seen-lasting-into-2016