Capital Commercial Trust [CCT]

Of all REITs in the world, I like this one in Sg.
Why?

1. Country risk is minimal as Sg is one of the few surplus countries in the world like Japan, China, Taiwan, Germany, Swiss, Australia etc. very rare indeed. Will not go bankrupt like Hungary or South Korea !
2. Underlying assets - are real properties. The Arab has this saying " properties may fall sick but they never die". True prop can never go broke but the owner may if they over-leverage! Like Sands casino or Donald Trump...
3. Strength of the sponsor - Capitaland which is controlled by Temasek -the Singapore SWF.Can't imagine if Capitaland will fail. It is the strongest developer in Asia - strong in Chinia, Sg, Australia and growing in Malaysia. Best in its class.
   
4. CCT has a very low average rent of SGD7.44 psf vs SGD15 for prime. Well if rental drop by 50% to 7.50, CCT is still square. Thus in my stress test, i factor in a drop of 25% rental income due to vacancies and drop in rent for some assets, NAV is still above SGD1.50. Thus now at 75c, is at a 50% discount to the 50% revised down NAV !!
5. Risk of tenant loss is less than 20% as many are long term lease;and blue chip clients like GIC, HSBC, JP Morgan, RC Hotels etc.
6. Only 3 out of 11 properties are secured by loans. Thus 8 of them are free from encumbrances. In the worse case, current NAV for that 8 assets are SGD2.7 bil or abt SGD2 per share. Assume a write down of 25%, revised NAV is SGD1.50 - again same value as above. These 8 assets provide a risk free underlying/base case value for CCT. Thus CCT's NAV can never go to zero.
   
7. Refinancing risk - this is non issue as prime properties offer the best exposure vs business loans or even consumer loans. And Sg banks are not short of liquidity ! Refer to no. 1 and no.3 above.
   
8. CIMB-GK rate CCT as the best deep value S-Reit now !

Stoneman

Citi & dividend cuts

Months ago I was jokingly telling my friends that you can buy Citi when it is USD1 buck. Guess what now it is abt 1.50. Very soon my prediction will come true. Years ago I also predicted that oil will trade at 40 ! Well it took 3 years for that to come true.

What's next? i think bank of America will trade at USd 1 - 2. Now abt 4 bucks. If it goes that cheap, I may buy 1000 units. If it goes up to USD30, that would be great ROI. Nice little gain.

Well I have decided to reduce my risk..no banking stocks except a smalle xposure.
Majority allocation will goto S-REITS. Singapore is a solid country with top leaders and huge reserves. They'll emerge stronger than everyone else in this region. Lowest risk destination.

Nationalize Insolvent Banks

Nouriel Roubini, 02.12.09, 12:01 AM EST

Paradoxically, this is a market-friendly solution to the crisis.

A year ago I predicted that losses by U.S. financial institutions would be at least $1 trillion and possibly as high as $2 trillion.

At that time, the consensus was that such estimates were gross exaggerations--the naïve optimists had in mind about $200 billion of expected subprime mortgage losses. But, as I pointed out, losses would rapidly mount well beyond subprime mortgages as the U.S. and global economy spun into a severe financial crisis and ugly recession.

I argued that we would see rising losses on subprime, near-prime and prime mortgages; commercial real estate; credit cards, auto loans and student loans; industrial and commercial loans; corporate bonds, sovereign bonds and state and local government bonds; and massive losses on all of the assets--collateralized debt obligations (CDOs), collateralized loan obligations, asset-backed securities and the entire alphabet of credit derivatives--that had securitized such loans.

By now, write-downs by U.S. banks have already passed the $1 trillion mark (my floor estimate of losses), and institutions such as the International Monetary Fund and Goldman Sachs predict losses over $2 trillion (close to my original expected ceiling for such losses).

But if you think $2 trillion is already huge, our latest estimates at RGE Monitor (available in a paper for our clients) suggest that total losses on loans made by U.S. financial firms and the fall in the market value of the assets they are holding will be, at their peak, about $3.6 trillion. The U.S. banks and broker-dealers are exposed to half of this much, or $1.8 trillion; the rest is borne by other financial institutions in the U.S. and abroad.

The capital backing the banks' assets was just $1.4 trillion (last fall), leaving the U.S. banking system some $400 billion in the hole, or close to zero even after the government and private-sector recapitalization of such banks. Thus, another $1.4 trillion will be needed to bring back the capital of banks to the level it had before the crisis, and such massive additional recapitalization is needed to resolve the credit crunch and restore lending to the private sector.

These figures suggests the U.S. banking system is effectively insolvent in the aggregate; most of the U.K. banking system looks insolvent, too, and many other banks in continental Europe are also insolvent.

No. 1: Recapitalization together with the purchase by a government "bad bank" of the toxic assets;

No. 2: Recapitalization together with government guarantees--after a first loss by the banks--of the toxic assets;

No. 3: Private purchase of toxic assets with a government guarantee and/or--semi-equivalently (a provision of public capital to set up a public-private bad bank where private investors participate in the purchase of such assets--something similar to the U.S. government plan presented by Treasury Secretary Timothy Geithner for a public-private investment fund);

No. 4: Outright government takeover (call it nationalization--or "receivership" if you don't like the N-word) of insolvent banks, to be cleaned after takeover and then resold to the private sector.

Of the four options, the first three have serious flaws. In the bad-bank model (the first, above) the government may overpay for the bad assets, at a high cost for the taxpayer, as their true value is uncertain; if it does not overpay for the assets, many banks are bust, as the mark-to-market haircut they need to recognize is too large for them to bear.

Even in the guarantee-after-first-loss model (No. 2 above), there are massive valuation problems, and there can be very expensive risk for the taxpayer, as the true value of the assets is as uncertain (as in the purchase of bad assets model).

The shady guarantee deals recently done with Citigroup (nyse: C - news - people ) and Bank of America (nyse: BAC - news - people ) were even less transparent than an outright government purchase of bad assets, as the bad-asset-purchase model at least has the advantage of transparency of the price paid for toxic assets.

In the bad-bank model, the government has the additional problem of having to manage all the bad assets it purchased, something that it does not have much expertise in. At least in the guarantee model, the assets stay with the banks. The banks know better how to manage--and also have a greater incentive than the government to eventually work out such bad assets.

The very cumbersome U.S. Treasury proposal to dispose of toxic assets, presented by Geithner, taking the toxic asset off the banks' balance sheets as well as providing government guarantees to the private investors that will purchase them (and/or public capital provision to fund a public-private bad bank that would purchase such assets). But this plan is so non-transparent and complicated it got a thumbs-down from the markets as soon as it was announced. All major U.S. equity indexes dropped sharply.

The main problem with the Treasury plan--that in some ways may resemble the deal between Merrill Lynch (nyse: MER - news - people ) and Lone Star--is the following: Merrill sold its CDOs to Lone Star for 22 cents on the dollar. Even in that case, Merrill remained on the hook in case the value of the assets were to fall below 22 cents, as Lone Star paid initially only 11 cents (i.e., Merrill guaranteed the Lone Star downside risk). But today, a bank like Citi has similar CDOs that, until recently, were still sitting on its books at a deluded value of 60 cents.

Since the government knows no one in the private sector would buy those most toxic assets at 60 cents, it may have to make a guarantee (formally or informally) to limit the downside risk to private investors from purchasing such assets. But that guarantee would be hugely expensive if you needed to convince private folks to buy at 60 cents assets that are worth only 20--or even 11--cents.

So the new Treasury plan would end up being again a royal rip-off of the taxpayer if the guarantee is excessive in relation to the true value of the underlying assets. And if, instead, the guarantee is not excessive, the banks need to sell the toxic assets at their true underlying value, implying that the emperor has no clothes.

A true valuation of the bad assets--without a huge taxpayer bailout of the shareholders and unsecured creditors of banks--implies that banks are bankrupt and should be taken over by the government.

Thus, all the schemes that have so far been proposed to deal with the toxic assets of the banks may be a big fudge--one that either does not work or works only if the government bails out shareholders and unsecured creditors of the banks.

So, paradoxically, nationalization may be a more market-friendly solution to a banking crisis. It creates the biggest hit for common and preferred shareholders of clearly insolvent institutions and, most certainly, even the unsecured creditors, in case the bank insolvency hole is too large; it also provides a fair upside to the taxpayer.

Nationalization can also resolve the problem of the government managing the bad assets: If you're selling back all the banks' assets and deposits to new private shareholders after a clean-up, together with a partial government guarantee of the bad assets (as was done in the resolution of the Indy Mac bank failure), you avoid having the government manage the bad assets.

Alternatively, if the bad assets are kept by the government after a takeover of the banks and only the good ones are sold back, through a reprivatization scheme, the government could outsource the job of managing these assets to private asset managers. In this way, the government can avoid creating its own Resolution Trust Corp. bank to work out such bad assets.

Nationalization also resolves the too-big-to-fail problem of banks that are systemically important, and that thus need to be rescued by the government at a high cost to the taxpayer. This too-big-to-fail problem has now become an even-bigger-than-too-big-to-fail problem, as the current approach has led weak banks to take over even weaker banks.

Laissez-Faire Capitalism Has Failed

Nouriel Roubini, 02.19.09, 12:01 AM EST

The financial crisis lays bare the weakness of the Anglo-Saxon model.

It is now clear that this is the worst financial crisis since the Great Depression and the worst economic crisis in the last 60 years. While we are already in a severe and protracted U-shaped recession (the deluded hope of a short and shallow V-shaped contraction has evaporated), there is now a rising risk that this crisis will turn into an uglier, multiyear, L-shaped, Japanese-style stag-deflation (a deadly combination of stagnation, recession and deflation).

The latest data on third-quarter 2008 gross domestic product growth (at an annual rate) around the world are even worse than the first estimate for the U.S. (-3.8%). The figures were -6.0% for the euro zone, -8% for Germany, -12% for Japan, -16% for Singapore and -20% for Korea. The global economy is now literally in free fall as the contraction of consumption, capital spending, residential investment, production, employment, exports and imports is accelerating rather than decelerating.

To avoid this L-shaped near-depression, a strong, aggressive, coherent and credible combination of monetary easing (traditional and unorthodox), fiscal stimulus, proper cleanup of the financial system and reduction of the debt burden of insolvent private agents (households and nonfinancial companies) is necessary in the U.S. and other economies.

Unfortunately, the euro zone is well behind the U.S. in its policy efforts for several reasons. The first is that the European Central Bank is behind the curve in cutting policy rates and creating nontraditional facilities to deal with the liquidity and credit crunch. The second is that the fiscal stimulus is too modest, because those who can afford it (Germany) are lukewarm about it, and those who need it the most (Spain, Portugal, Greece, Italy) can least afford it, as they already have large budget deficits. The last reason is that there is a lack of cross-border burden sharing of the fiscal costs of bailing out financial institutions.

With its aggressive monetary easing and large fiscal stimulus putting it ahead, the U.S. has done more. Except for two elements, both key to avoiding a near-depression, which are still missing: a cleanup of the banking system that may require a proper triage between solvent and insolvent banks and the nationalization of many banks, even some of the largest ones; and a more aggressive, across-the-board reduction of the unsustainable debt burden of millions of insolvent households (i.e., a principal reduction of the face value of the mortgages, not just mortgage payments relief).

Moreover, in many countries, the banks may be too big to fail but also too big to save, as the fiscal/financial resources of the sovereign may not be large enough to rescue such large insolvencies in the financial system.

Traditionally, only emerging markets suffered--and still suffer--from such a problem. But now such sovereign risk, as measured by the sovereign spread, is also rising in many European economies whose banks may be larger than the ability of the sovereign to rescue them: Iceland, Greece, Spain, Italy, Belgium, Switzerland and, some suggest, even the U.K.

The process of socializing the private losses from this crisis has already moved many of the liabilities of the private sector onto the books of the sovereign. Among these liabilities are banks, other financial institutions and, soon possibly, households and some important nonfinancial corporate companies.

At some point a sovereign bank may crack, in which case the ability of governments to credibly commit to act as a backstop for the financial system, including deposit guarantees, could come unglued.

Thus the L-shaped, near-depression scenario is still quite possible (I assign it a 30% probability), unless appropriate and aggressive policy action is undertaken by the U.S. and other economies.

This severe economic and financial crisis is now also leading to a severe backlash against financial globalization, free trade and the free-market economic model.

To paraphrase Churchill, capitalist market economies open to trade and financial flows may be the worst economic regime--apart from the alternatives. However, while this crisis does not imply the end of market-economy capitalism, it has shown the failure of a particular model of capitalism. Namely, the laissez-faire, unregulated (or aggressively deregulated), Wild West model of free market capitalism with lack of prudential regulation, supervision of financial markets and proper provision of public goods by governments.

There is the failure of ideas--such as the "efficient market hypothesis," which deluded its believers about the absence of market failures such as asset bubbles; the "rational expectations" paradigm that clashes with the insights of behavioral economics and finance; and the "self-regulation of markets and institutions" that clashes with the classical agency problems in corporate governance--that are themselves exacerbated in financial companies by the greater degree of asymmetric information. For example, how can a chief executive or a board monitor the risk taking of thousands of separate profit and loss accounts? Then there are the distortions of compensation paid to bankers and traders.

This crisis also shows the failure of ideas such as the one that securitization will reduce systemic risk rather than actually increase it. That risk can be properly priced when the opacity and lack of transparency of financial firms and new instruments leads to unpriceable uncertainty rather than priceable risk.

It is clear that the Anglo-Saxon model of supervision and regulation of the financial system has failed. It relied on several factors: self-regulation that, in effect, meant no regulation; market discipline that does not exist when there is euphoria and irrational exuberance; and internal risk-management models that fail because, as a former chief executive of Citigroup put it, when the music is playing, you've got to stand up and dance.

Furthermore, the self-regulation approach created rating agencies that had massive conflicts of interest and a supervisory system dependent on principles rather than rules. In effect, this light-touch regulation became regulation of the softest touch.

Thus, all the pillars of the 2004 Basel II banking accord have already failed even before being implemented. Since the pendulum had swung too much in the direction of self-regulation and the principles-based approach, we now need more binding rules on liquidity, capital, leverage, transparency, compensation and so on.

But the design of the new system should be robust enough to counter three types of problems with rules. A tendency toward "regulatory arbitrage" should be kept in mind, as bankers can find creative ways to bypass rules faster than regulators can improve them. Then there is "jurisdictional arbitrage," as financial activity may move to more lax jurisdictions. And, finally, "regulatory capture," as regulators and supervisors are often captured--via revolving doors and other mechanisms--by the financial industry. So the new rules will have to be incentive-compatible, i.e., robust enough to overcome these regulatory failures.

Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics, is a weekly columnist for Forbes.com.

 

What is happening today? Jumbo loans in US going bad

Bloomberg just reported today that there is increasing delinquency in the jumbo loans - typically more than 500k USD. So the rich is getting into trouble after almost 18 months subprime crisis started.

The other shoes to drop more are:-

• jumbo, alt-A loans etc. All forms of residential mortgages
• commercial real estate and malls etc
• corporate loans esp the weaker ones - like GM
• Bonds defaults !
  
• credit cards and other forms of consumer loans
• car loans
• and all other loans

These crisis is now no longer financial. It is real and unemployment will be above 10%.

Will this be a great depression? Well if it starts with deflation, and the crisis prolongs or Obama team mishandle - then yes depression will come.

So far I don't like the stimulus packages:-
- only about 300b out of 800b of the plan will be felt in 2009. The rest will kick in from 2010 onwards. All infra contracts must be up for competitive bids. It will be a slow process. Thus higher possibility that economy will turnaround in 2010.
- not enough details in the plans ! What is the stress test?? Can they not just come out and announce that banks will not be nationalised?? what so difficult about that?

I used to put Bank of America and Citi on my buy list. But now I am avoiding all US banking stocks. The only bank I may want to touch is UBS which is down to USD10 from USD60. But it will go down somemore with US IRS going after them, and further correction to come. Basically the salaries of these highly paid bankers will have to come down ! They don't deserve those pay checks. Once that happens, the banks will recover more of the revenue.

Stoneman

Australia’s worst-case trade scenario — 5 years of no growth

SYDNEY, Jan 24 — Australia is staring down the barrel of its worst export slump in 50 years and a bigger shock to the nation's terms of trade than any time since the 1997-98 Asian crisis.

The nation's top 10 trading partners are in the middle of, or entering, an economic meltdown, with Western and Asian economies entering a cycle of contraction that experts fear could mean up to five years of flat global growth.

The next shock to the Australian financial system is expected to come when contract prices for its exports, particularly iron ore and coal, are renegotiated. The nation's terms of trade — the difference between export prices and import prices — hit record highs last year thanks to the seemingly endless commodities boom. But the news from Asia — the destination for more than half its exports — hasn't been good this week.

UBS economist George Tharenou told The Weekend Australian: “The main near-term weakness is going to come through export terms of trade. There will be a considerable fall from the second quarter onwards when bulk commodity price are renegotiated downwards.''

Export figures for the last quarter of last year are also shaping up as the worst for 50 years. “Fourth-quarter 2008 and first-quarter 2009 exports volume will be weak. We are expecting exports in them to fall by 5 per cent for (the December quarter),'' Tharenou said.

If this is correct, it will be the worst for the past 50 years, beating the 4.8 per cent fall in the third quarter of 1997 as the Asian currency crisis hit Australia.

The most important terms-of-trade negotiations — the iron ore price talks with China — have been brought forward by Australia's biggest miner, BHP Billiton. Analysts expect prices for iron ore and other minerals to come down between 30 and 50 per cent. This would bring the terms of trade to levels of two years ago but the negative shock will be in the swing from last year's large increases — almost 80 per cent for iron ore — to sharp falls.

The growing problems for Australia's exports markets, and the flow-on effect to the broader economy, were underscored this week by an avalanche of worse than expected economic data from the region — the destination of most Australian exports. China, Korea and Japan alone take 42 per cent of Australian exports. Figures this week revealed China's growth had slowed from 9 per cent to a seven-year low of 6.8 per cent in the December quarter. Japan is already in recession and Korea probably is too.

“Realistically it will be a bad first half across the region,'' said Macquarie Securities chief Asian economist Bill Belchere. “It will probably flatten a bit in the second half and then bottom.''

But he warned that the bottoming could last some years. “There could be three to five years perhaps before the global economy does hit potential growth,'' Belchere said. He said there were deep structural problems with Asian economies being geared to consumption in OECD countries that had now dried up.

This week's figures have confirmed the worst fears of analysts, who now see few signs of recovery this year.

“The outlook for the global economy continues to deteriorate,'' Citi global chief economist Lewis Alexander said. “Incoming data have, almost uniformly, surprised on the downside.

“A combination of declining wealth, notably higher uncertainty and financial disruptions appears to have led to sharp declines in demand around the world.

“A significant contraction in international trade is helping to propagate these shocks around the globe.''

Alexander said that sharply contracting output was likely to lead to further declines in demand as income falls rapidly.

“There are scant signs that the momentum of this negative cycle is waning,'' he said. “It's hard to fathom the breadth and depth of bad news that is now pouring forth from north Asia particularly, as well as other major economies across the region, such as Taiwan, Singapore and Malaysia.''

Australia biggest two-way trading partner — China — has grabbed headlines this week as its growth fell off a cliff. But the problems are a lot worse in other countries.

The economy in South Korea, Australia's No. 4 trading partner, grew just 2.5 per cent over the whole of 2008, the slowest pace since the Asian financial crisis of 1997-98, after it contracted an astonishing 5.6 per cent in the December quarter.

Only last month the South Korean central bank forecast 2 per cent growth this calendar year but a contraction of 1-3 per cent is now widely expected.

“Domestic demand was the clear drag in (the fourth quarter) and will likely continue to keep growth down in (the first half of 2009),'' a Credit Suisse report said yesterday. “In our view, a rapid recovery seems unlikely until visibility of global demand improves.''

Japanese exports fell by a record 35 per cent in December as demand for imports, including Australian raw materials, continued to slide.

“Import volume was indeed down from a year earlier for each of these categories and, with commodities prices having plunged so steeply since mid-2008, we expect lower prices and weaker demand to translate into year-on-year declines in import value from April 2009 onwards,'' Credit Suisse economists said.

Malaysia is viewed as one of non-Japan Asia's most vulnerable economies to the global economic downturn. Malaysia is also indirectly but heavily exposed to falling commodity prices and falling tourism arrivals.

The flow-on effects as Asian markets seize up, punching gaping holes in Australian exports markets, will be by way of a massive pay cut in terms of national income. “The record terms of trade has been boosting nominal gross domestic product, meaning things have felt a lot better,'' Tharenou said.

“Now, there will be less money sloshing around from corporate profits and taxation. This will mean no budget surpluses, less money for tax handouts and the possibility of a budget deficit position.''

This will trigger cuts in export-associated industries as resource and mining companies slash jobs, flowing on to less demand for general consumables and housing.

“The trickle-down effect will be that there is less national income available and that will feel like a pay cut for the economy.''

Still, some analysts suggest that it is not a relentless picture of doom and gloom, especially from China.

Credit Suisse China analyst Dong Tao said the most important figures released by China this week were not the GDP numbers but those for industrial production. These reported 7 per cent growth in December compared with the same month last year, up from 5.4 per cent in November.

“This is consistent with our call that production growth might be bottoming,'' Tao said. “We do acknowledge that this is a minor rebound from an extremely low level, but nonetheless the rise is significant. We suspect the rebound is largely caused by a slowdown in inventory correction in the materials sector after a drastic change in price expectations on commodity prices.'' — The Australian

Roubini Sees China Recession Despite ‘Massaged’ GDP (Update1)

By Michael Patterson

Jan. 22 (Bloomberg) -- China is in a recession despite government statistics today showing the world’s third-largest economy expanded in the fourth quarter from a year earlier, according to Nouriel Roubini, the New York University professor who predicted last year’s economic crisis.

“China is in a recession regardless of what the highly massaged official numbers claim,” Roubini, a professor at NYU’s Stern School of Business and the chairman of consulting firm Roubini Global Economics, wrote in a note today on his Web site. “When growth is slowing down sharply the Chinese way to measure GDP is highly misleading.”

Unlike the U.S. and western Europe, China’s figures on gross domestic product measure growth from the same quarter a year ago rather than the previous three months. The year-on-year figures fail to capture the economy’s slowdown at the end of 2008 because growth was so high in the preceding quarters, Roubini wrote.

The government’s statistics bureau said fourth-quarter GDP grew 6.8 percent from a year earlier, after gains of at least 9 percent in the previous three quarters.

China’s stocks rose to a one-month high after the GDP figure matched the median estimate of economists surveyed by Bloomberg News. Health-care stocks including North China Pharmaceutical Co. climbed after the government said it will spend 850 billion yuan ($124 billion) to help expand medical care. The CSI 300 Index rose 1.1 percent to 2,044.55, the highest close since Dec. 19.

Falling Exports

Investors should buy China’s agriculture, water treatment, power generation and infrastructure stocks because the companies won’t be hurt by the nation’s slowing economy, investor Jim Rogers said in an interview today.

“There is a lot happening in China and there will be those that will hold up well,” said Rogers, who correctly predicted the start of the commodities rally in 1999 and wrote books on investing including “A Bull in China: Investing Profitably in the World’s Greatest Market.”

Declining power output and shrinking manufacturing suggest the economy is contracting, Roubini wrote.

China’s electricity production declined more than 7 percent from a year earlier in November and fell about 3 percent in October, the first declines since February 2002, according to China Economic Information Net data compiled by Bloomberg. China’s exports fell 2.8 percent in December, the most in almost a decade, as the deepening global recession cut demand for the nation’s toys, clothes and electronics.

Roubini said at a conference in Dubai this week that U.S. financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is “effectively insolvent.” He also predicted oil prices will trade between $30 and $40 a barrel all year.

Roubini wasn’t immediately available to comment on the report, his spokesman said.

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.

Last Updated: January 22, 2009 08:49 EST