I was not expecting an update from Mike but I received this email just moments ago. Here is an edited version of what he sent clients.
After receiving a lot of frantic phone calls this week, I thought it might be easier to put something out. The big question has been “Is this the bottom?” My response is, Are you kidding?
For those of you wondering what is going on over the last couple of weeks, read some of my pieces from a year ago. Not much has changed, so there is no reason to write for public consumption. I don’t pick stocks, nor do I talk about trades, so I’m not concerned with the run up in the builders over the last couple of weeks.
I can tell you this. I wrote about all of the builders that have filed BK and are going under. I wrote about them two years ago. I said one third of the current builders would go BK, and I still believe it. In fact, I said at least three of the top five would not make it. That is still the case. Nothing has changed when you look at impairments to come, JV issues to come, inventory and the economy.
Do I pull these things out of a hat? No. I actually spend time in the field. You can only do so much with numbers. But when the numbers don’t match reality, BINGO. So here’s five reasons why we are nowhere near the bottom.
- The builders have only taken from 15 – 50% of their impairments. Some have been better than others, but overall I’d say it’s about 30% with 70% yet to come. Jim Wilson and Ivy think we’ve seen the worst. They still have their heads in the ground. Do your own homework. Just look at the number of communities impaired and the level of impairments.
- The talking heads seem to think the Bernanke fix is going to make everything nice. The Bernanke fix was about as helpful as a shot and a beer for a heroin junkie. It’s not going to fix anything. If anything, it will make a lot of things worse.
- Nearly every other analyst still fails to understand the value of getting out in the field. As for being near the bottom – nonsense. As for all of these terrific land, condo and community deals at 50 cents on the dollar – poppy cock. If you think paying 50 cents on the dollar is a smart move, when something is worth 25 cents, go for it. Better yet, call me. I have tons of it. Even worse than paying 50 cents when something is only worth 25, is the fact that much of the stuff we have looked at is actually worthless. How can that be, you ask? Trust me. It can. It is. And I’ve seen deals go down where the buyers bought themselves a liability.
- The financial write downs from the banks and mortgage companies are not over. I am still hearing the same thing … “We don’t know what we own. And even if we did know, we don’t know how to price it.” Some of these guys have tried to sell small pieces, in order to mark to market. Guess what? No bids!
- Bank inventory – I’ve written about this a little. We’re seeing this problem start to pus up. I figure it will take about another 8-12 months before it pops. Basically, the banks have no clue what to do with the properties they are foreclosing on and the properties where buyers have stopped paying their mortgage. There are some extreme examples, but we’re seeing the same basic problems nationwide. Eventually, this problem will hit the markets hard in prices and inventory. It will also be an investment opportunity for a large fund to step in, providing they have their ducks in a row before approaching the banks.
Four areas of concentration for my clients have been fruitful.
- Biotech – Not the stocks, but the land in areas where biotech parks are being developed in Florida. The University of Miami just announced their own biotech plans.
- Senior Care Living
- Deep Water Land
- Unique Office Space Opportunities – This one is something that takes advantage of the drop in office building prices, as well as the hit the economy is taking at the small business level. Very intriguing opportunity.
Condos – Not a chance. Even the deals at 30 cents on the dollar are garbage. Be very careful here. I’ve seen a lot of deals where formally smart money thinks they are getting a deal. They are a bad deal. Be very careful. It is too soon.
The Bottom Line: Expect to see lower margins, lower sales, growing inventory, lower prices for land and finished product, all adding to more impairments and losses with much more to come.
Contact information for Mike Morgan about this article or for Ground Zero Consulting Services to Wall Street and Retail Buyers: Email Mike Morgan
Mike “Mish” Shedlock
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