Commercial Real Estate Is a ‘Time Bomb,’ Maloney Says

July 9 (Bloomberg) — The $3.5 trillion commercial real estate market is a ticking “time bomb” that may lead to a second wave of losses at large U.S. banks, congressional Joint Economic Committee Chairwoman Carolyn Maloney said.

About $700 billion in commercial mortgages will need to be refinanced before the end of 2010 and “doing nothing is not an option,” Maloney, a New York Democrat, said at a committee hearing today. This “looming crisis” may lead to significant losses for banks, force shopping center and hotel owners into bankruptcy, and impede economic recovery, she said.

The response by banks to this “growing threat has been slow and inadequate,” said James Helsel, a partner at RSR Realtors in Harrisburg, Pennsylvania, and treasurer for the National Association of Realtors. “The lack of liquidity and banks’ reluctance to extend lending are also becoming apparent in the increasing level of delinquent properties.”

There were 5,315 commercial properties in default, foreclosure or bankruptcy at the end of June, more than twice the number at the end of last year, with hotels and retail among the most “problematic,’ Real Capital Analytics Inc. said in a report yesterday. Losses on commercial mortgage-backed securities, or CMBS, will total 9 percent to 12 percent of the market, or as much as $90 billion, said Richard Parkus, a research analyst for Deutsche Bank Securities in New York.

Bottom Not Near

The bottom is several years away, and it will be at least 2012 before there is “palpable improvement” in the commercial real estate market, Parkus told lawmakers at the hearing. “It’s hard to imagine fundamentals improving in an environment where we are beginning to see massive increases in defaults.”

The largest concentration of distressed properties is in New York City, Helsel said. Las Vegas, Los Angeles, Detroit, Phoenix, Chicago, Dallas and Boston also have high distress rates, he said.

A tightening in issuance of CMBS, which used to account for about 30 percent of financing, has exacerbated problems, Jon D. Greenlee, the Federal Reserve’s associate director for banking supervision and regulation, said in prepared testimony today. A disproportionately high number of small and medium-sized banks have “sizable exposure” to commercial real estate loans, and delinquency rates at around 7 percent in the first quarter are almost double from a year ago, he said.

“Market participants anticipate these rates will climb higher by the end of this year, driven not only by negative fundamentals but also borrowers’ difficulty in rolling-over maturing debt,” Greenlee said. “In addition, the decline in CMBS has generated significant stresses on the balance sheets of institutions that must mark these securities to market.”

Fed Programs

The Federal Reserve has expanded its Term Asset-Backed Securities Loan Facility, or TALF, to new and existing commercial mortgage backed securities to jump start the market. Maloney said the Public Private Investment Program, or PPIP, may also help with the problem as officials release more details of its potential use.

Maloney said the TALF program expires at the end of this year, which may short cut its effectiveness “just as it begins to ramp up.” She also said that uncertainty about the future of the PPIP has kept many investors “on the sidelines, so there’s some urgency to the Treasury providing additional clarity about the program.”

Tamiflu-Resistant Flu Found in Three World Regions

 

July 9 (Bloomberg) — Swine flu resistant to Roche Holding AG’s antiviral drug Tamiflu has been detected in at least three world regions, raising concern the pandemic virus is developing immunity to the medicine, health officials said.

The drug-resistant cases “need to be watched,” though recommended use of Tamiflu hasn’t changed, said Thomas Frieden, director of the U.S. Centers for Disease Control and Prevention in Atlanta. Frieden spoke at a swine flu meeting in Washington organized by U.S. health officials to plan for outbreaks.

U.S. Health and Human Services Secretary Kathleen Sebelius said the government is making $350 million available to states and hospitals to prepare for pandemic flu. The H1N1 virus is infecting a younger population than seasonal flu and causing potentially fatal complications in otherwise healthy people ages 30 to 50, pregnant women and those with asthma, diabetes and obesity, the World Health Organization said.

“The possibility of an anti-viral resistant strain emerging is a serious consideration,” Sebelius said at the conference. “To date, anti-viral medications have proven effective against the disease in most cases.”

Sebelius said applications for the money are due in the next two weeks, and the funds will be distributed by the end of this month.

Vaccines

Vaccines offer the best protection against the flu, and the U.S. will begin human tests of an immunization in the first week of August, said Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases in Bethesda, Maryland. If health officials decide to go ahead with vaccinations, they will likely begin in early October, he said.

“It’s impossible to predict right now, here in the northern hemisphere, whether this will dominate in the sense of crowding out the standard seasonal circulating flus,” Fauci said today in a telephone interview. “We know that it is still hanging around, we’re still seeing outbreaks in summer camps, but we don’t know what’s going to take over in the fall and winter season when you have the optimal spread of influenza.”

Last week, Hong Kong’s health department said Tamiflu- resistant swine flu was found in a 16-year-old U.S. girl who hadn’t taken the pill. It was the first known instance of resistance in a swine flu patient not treated with Tamiflu, stockpiled by governments worldwide to fight pandemic influenza. The teen’s flu was diagnosed after she flew from San Francisco to Hong Kong. Cases of Tamiflu-resistant flu have also been reported in Denmark and Japan.

Resistance Tests

Swine flu has infected more than 1 million people in the U.S., though most haven’t been tested for the illness, according to the CDC. About 94,500 cases have been confirmed by laboratory tests worldwide, the World Health Organization reported on its Web site. About 1,000 virus samples have been tested for drug- resistance, and only the three samples tested resistant to Tamiflu, the WHO said.

Roche’s Tamiflu, a pill, and GlaxoSmithKline Plc’s flu drug Relenza, an inhaled powder, reduce the severity and the duration of influenza symptoms by 24 to 30 hours if treatment is started within the first two days of illness, according to the companies.

Tamiflu was unable to fight most seasonal flu strains that circulated in the U.S. earlier this year, according to the CDC. In December, the agency recommended that U.S. patients take Relenza or a combination of Tamiflu and an older drug called rimantadine to fight seasonal infections.

Stockpiling Tamiflu

Fears of a global influenza outbreak prompted governments, mostly in developed countries, to store millions of courses of Tamiflu that could be used to prevent infection in health-care workers and others performing critical job functions.

That demand spurred Tamiflu sales of 2.6 billion Swiss francs ($2.4 billion) in 2006 and 2.1 billion francs in 2007. Last year, sales dipped to 609 million francs as government stockpiles filled.

Asthma is “the leading single underlying diagnosis with H1N1, present in a third of hospitalizations” and patients with morbid obesity have higher rates of asthma, the CDC’s Frieden said today.

State and local officials are “critical links” to fighting a pandemic, PresidentBarack Obama said in a telephone address to the meeting from Italy. He said health agencies at every level need to plan for vaccine programs and disruptions to schools and workplaces in the U.S. fall, when illness rates are expected to rise.

“The potential for a significant outbreak in the fall is looming,” Obama said.

“We want to make sure that we are not promoting panic, but we are promoting vigilance and preparation.”

Burgeoning California IOU market faces hurdle

A nascent market that’s grown out of cash-strapped California’s move to issue paper promises to its vendors may have hit a snag, relegating trades in these newly printed IOUs to privately negotiated transactions.

Investors have shown interest in buying some of the $3 billion in IOUs the state started to issue last week to businesses and taxpayers it owes money, as long as they could buy them at a discount. They are, after all, a form of small-denomination municipal debt.

But without a solid way of identifying these certificates, or a clearing house like Euroclear to settle trades, the deal’s off, says one trader.

“My view is that California is not going to default, that these things will be paid off,” said Andrew Brenner, a trader with MF Global. He said he looked into buying IOUs for clients that saw an opportunity to buy the notes, known as “state-registered warrants,” at a discount and then redeem them at full value when the state sorts out its cash problems.

But without a CUSIP, or standard way of tracking individual securities, “there’s no way to identify it, no way to clear it,” he said. “I’m not going to eBay.”(EBAY 16.10, +0.08, +0.50%)

On July 2, the state started issuing IOUs after Gov. Arnold Schwarzenegger, the state legislature and voters failed to agree on a deal to bridge the state’s roughly $24 billion budget deficit.

The state will pay a 3.75% annual interest rate when it redeems the IOUs, and it’s vowing to do that no later than Oct. 2.

Major banks such as J.P. Morgan Chase & Co. (JPM 32.72, +0.01, +0.03%), Wells Fargo & Co. (WFC 22.92, +0.01, +0.04%) and Bank of America Corp. (BAC 11.90, +0.06, +0.51%)have said they will accept the warrants from customers until Friday.

Shortly after state Treasurer Bill Lockyer announced plans to issue the IOUs, ads started to pop on Web sites such as Craigslist.org from people looking to buy the IOUs, preferably at less than face value. One lure is the belief that lawmakers will eventually figure out how to close the budget hole, either by raising taxes or cutting services, or both. Some are just looking for souvenirs.

“Got an IOU and need cash now? I am paying 85 cents on the dollar for any / all California IOU’s,” read a posting Tuesday on Craigslist.org by a user in Sunnyvale, Calif.

Demand to buy these IOUs for prompted Lockyer’s office earlier this week to release ground rules for redeeming IOUs sold to third parties. The state Treasurer’s office said it needs to see a notarized bill of sale signed by the payee whose name appears on the warrant.

On Monday, Fitch Ratings downgraded the state’s bond ratings to BBB from A-, citing the state’s “continued inability to achieve timely agreement on budgetary and cash flow solutions to its severe fiscal crisis.”

China’s copper imports may plunge 64% in second half

Publishing Date

07 Jul 2009 11:23am

 

Copper imports by China may plunge 64% in the second half after record shipments this year led to excess stocks, UBS AG said.

China, the world’s largest consumer of the metal, may cut refined copper imports to around 100,000t/mth in July to December, from an average of 280,000t/mth in the first five months, UBS analysts led by Peter Hickson said in an e- mailed report dated July 6.

There are “clear indications that China is now overstocked” as the Strategic Reserve Bureau is offering up to 100,000t of copper to the market and traders are preparing for exports of the metal, the UBS report said.

Chinese imports “couldn’t decrease so sharply in the second half,” Yang Gang, a trader at LG International Corp, said from Shanghai. Many long-term contracts have been booked and importing copper as a way to obtain finance is very active too, he said, referring to the credit terms traders can obtain from banks.

Copper, used in construction and power grids, has dropped 9%  from the year’s high of US$5,388/t on the London Metal Exchange on concern that China may slow purchases.

The country’s record shipments lifted prices 60% this year, closing the gap between London and Shanghai rates and making it unprofitable to import the metal into China.

UBS estimated that China may have stockpiled 500,000 to 700,000t of copper in excess of its industrial needs in the first quarter, 300,000t of which “is apparently destined for the Strategic Reserve Bureau.”

This compares with Macquarie estimates of as much as 400,000t of total stockpiles, including a 50,000t increase in Reserve Bureau stock. Caijing magazine reported in June that China has bought 235,000t of copper for strategic reserves this year, citing Yu Dongming, a Chinese government official.

The copper market will “remain relatively tightly balanced in the foreseeable future,” with China’s re-stocking having “prevented the accumulation of a sizeable surplus in reported inventories,” the UBS report said. Copper inventories monitored by the LME dropped 22% this year.

Technical Warning: Dow 400 point risk in near term !

Dow breaks the 8,200 level today with a strong push…with the Dow down 161 points. Next decent support level around 7,800. Having broken the 8,200 the Dow looks poised for a sharp move down from here until it is either over sold or hits a much much stronger support level.

Proprietary Trading May Cause October Crash: Invest

Global stock markets could crash in October, as by then it will be clear that the economic recovery many people pinned their hopes on will not materialize, the stimulus option will no longer be a viable one, and proprietary trading desks will decide to go short, economist and investor Enzio von Pfeil, CEO of EconomicClock.com, told CNBC.

“The economic time has to worsen and so these green shoots will morph into black shoots very badly, culminating probably in an October crash,” Pfeil said.

“People will finally accept that the unemployment rates will have to keep rising, that productivity will have to keep falling,” he added. That in turn will make earnings expectations “fall through the floor.”

But another analyst rejected his claims, saying predictions of a crash are exaggerated. Anko Beldsnijder, senior portfolio manager at MainFirst Bank, disagreed with the October crash theory.

“A crash – I think that is, in the short term, quite difficult to see because the main problem is a lot of investors are still not in the market, are still very defensively positioned,” Beldsnijder told “Worldwide Exchange” in the same segment.

“The key problem is: who should sell for a crash, where should the main disappointment be,” he added.

With a backdrop of rising unemployment and an excess supply of goods, Pfeil cited three other key reasons for expecting stocks to tank this winter.

Firstly, he thinks the much hoped-for economic recovery will not materialize and governments will be unable to keep showering the global economy with stimulus packages. 

“What will become very apparent by then (October) is the so-called global recovery just is not going to happen. The governments have run out of ammunition, they cannot go on stimulating the economies,” Pfeil said. “On top of which, you will find that China itself will be running out of ammunition.”

The big proprietary trading desks have been making money on a bull run, but “the only thing that is going to be out there is to have major, major short positions,” he added.

A third reason to expect declines in October is simply the seasonal factor, according to Pfeil.

“Stupid as it sounds, this is normally when crashes occur, in October. I cannot tell you why,” he said.

The declines are set to start in the U.S. and affect Western markets more than Asia, according to Pfeil.

Latvia Won’t Need Bigger Bailout, EU Commission Document Shows

July 7 (Bloomberg) — Latvia won’t need a bigger bailout package because the country’s recession, the severest in the European Union, undermined domestic demand, helping to bridge an external financing gap, a European Commission document shows.

The current account will return to a surplus of about 600 million euros ($835.5 million) in total through 2009 and 2010, an improvement equivalent to about 3.5 billion euros compared with December estimates for those years, the Commission said in a confidential draft document obtained by Bloomberg News and dated June 14.

The Commission, the EU’s executive arm, is the main contributor to Latvia’s 7.5 billion euro stabilization loan. The Baltic state’s current-account gap, the EU’s biggest in 2006, turned to surplus in the first quarter after the economy contracted 18 percent and state pay cuts scuppered demand.

“The updated estimate of the financing gap indicates that Latvia is likely in no need of additional external assistance,” the Commission said in the document, which was submitted to EU finance ministers and officials. “The main reason is the substantial improvement in the current account deficit, which reduces Latvia’s gross financing requirements.”

Latvia’s bailout, which is also funded by the International Monetary Fund, is equivalent to 34 percent of gross domestic product. The country obtained the loan in December, when the government expected the economy to shrink 5 percent this year. Its latest forecast points to an 18 percent GDP contraction.

Bank Rescue

The document, prepared by the Economic and Financial Committee, a group made up of finance ministry, European Central Bank and Commission officials, shows Latvian government debt may grow to 64 percent of GDP next year, and 77 percent in 2011, including financial industry stabilization costs.

Latvia rescued the country’s second-biggest bank, AS Parex Banka, last year, investing 140.75 million lati ($282.4 million) in the lender’s capital and providing a subordinated loan, the bank said on May 22.

Latvia’s parliament passed budget cuts of 500 million lati last month to unlock the transfer of a 1.2 billion-euro tranche from the EU. The Commission has said the money will be paid at the end of July. Those assurances have helped restore confidence in the state’s ability to stay afloat.

The country will cut spending by a further 500 million lati every year over the next three years to bring the deficit to within 3 percent of GDP by 2012.

Implied Deficit

The cost of insuring against default on 10 million euros of five-year debt declined to 680,000 euros on July 3, compared with about 740,000 euros a week earlier. Even after the decline, credit default swap spreads on Latvian sovereign debt are the second-highest of the 26 emerging market economies tracked by Bloomberg, after Ukraine.

The budget cuts “would imply, according to the current fiscal baseline, reaching a deficit for 2009 of around 11 percent of GDP,” the Commission said.

To finance next year’s cuts, the government is considering raising personal income tax to 25 percent from 23 percent, raising the personal income tax on the self-employed to 25 percent from 15 percent and introducing capital gains tax, the Commission said. The tax on commercial real-estate may be raised to 3 percent and a tax on residential property may be introduced, it said.

The government may also deepen cuts in pensions and benefits “possibly targeting higher income beneficiaries,” and is considering raising the retirement age from 2010, according to the document. Parliament has already passed a bill that will cut pensions by 10 percent, state salaries by 20 percent and pension payments by 70 percent for working pensioners.

Higher Taxes

The administration of Prime Minister Valdis Dombrovskis may also increase the value-added tax to 23 percent from 21 percent to cover potential gaps “if insufficient measures are identified leading to the overall adjustment of 500 million lati,” the document said.

The economy will contract 18 percent this year and 4 percent next year before expanding 1.5 percent in 2011 and 3.8 percent in 2012, according to the Commission’s main estimates.

Latvia’s unemployment rate will average 15.8 percent in 2009 compared with 13.9 percent in the first quarter, the document said. The jobless rate will rise to 17.4 percent in 2010, according to the Commission.