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April 16, 2009

GGP Has Finally Filed Bankruptcy, Proving My Analysis to be On Point Over the Course of 18 Months
by Reggie Middleton

I am still in the process of preparing the Goldman Sachs stress tests for publication, but came across this headline in Bloomberg: General Growth Files for Protection in Biggest U.S. Real Estate Bankruptcy.

This prompted me to excerpt a portion of the Pro level Stress Test Analysis to publish on the public blog. Remember that Goldman has some of the highest VaR numbers of the bulge bracket save the collapsed Lehman Brothers, who collapsed in large part due to their commercial real estate exposure (as well as Bear Stearns). I also want to point out the investment horizon that I use when implementing my research. With the recent bear market rally forcing shorts into drawdown, keep in mind that my research looks 3 months to 1 year out. I personally bought puts on GGP at $60 and suffered through many a drawdown before the position reached fruition. That means that if I say XYZ company has poor prospects and that company doubles in price within 3 months, it really has no bearing on whether said analysis was right or wrong. I have absolutely no control or special insights into the markets. I can tell you if a company is in trouble though. The issue is, this trouble takes time to manifest, and this time period is often more than just a few months. Be prepared to hold on to your positions for a year or more. Trust me, it is worth it and I am right more often than not. Shorting a company from $60 to $1 yields a very strong IRR of return on an annual basis. Patience is both justified and highly rewarded. A lack of patience and weak hands easily turns a big profit into a big loss.

Goldman Sach's CMBS Pressure Points and Other Risk Factors Not Reflect in VaR

I have been banging the table about the unappreciated risk the commercial real estate market poses since September of 2007 - way before the crowd of investors, pundits, analysts and media. See:

• Will the commercial real estate market fall? Of course it will.
• Do you remember when I said Commercial Real Estate was sure to fall?
• The Commercial Real Estate Crash Cometh, and I know who is leading the way!

Well, the nations second largest property owner and REIT has just filed chapter 11, after I warned readers over a year and a half ago of this very distinct possibility. See General Growth Files for Protection in Biggest U.S. Real Estate Bankruptcy then go on to read the 80 or so pages of research that I have generated to support riding the share price down from $60 to near zero: GGP and the type of investigative analysis you will not get from your brokerage house.

This underappreciated risk will reverberate through investment banks, insurers, money center and regional banks alike for these are the sourced of the large nonrecourse loans and CMBS that funded these vehicles. In addition, the retail mall REITs will see significant hits to asset prices and consequently rents (more so than they have already seen, which has been significant already) which will put additional stress on debt service. Keep in mind that the GGP issue is not confined to GGP. Debt that had financed assets during a property bubble cannot be rolled over due to a dearth in financing - causing bankruptcy. Chances are that this will be seen several more times in the next 8 quarters or so. Long story short - expect valuations, rents, credit quality and cashflows to drop as vacancies and delinquencies rise.

The commercial real estate risk that Goldman Sachs is woefully underappreciated by the market and apparently unknown to the sell side analytical community. Take it from the guy that clearly anticipated the fall of Bear Stearns (Is this the Breaking of the Bear? [Sunday, 27 January 2008]) and (with the help of his readers) pointed out the Lehman Brothers CRE implosion connection (Is Lehman really a lemming in disguise? [Thursday, 21 February 2008]), as well as the GGP debacle in full detail (GGP and the type of investigative analysis you will not get from your brokerage house). Goldman has risk here, among other places that aren't even visible in its rapidly increasing VaR numbers....

See also: The Official Reggie Middleton Bank Stress Tests

Reggie Middleton
Reggie Middleton, LLC
Perpetual Interests, LLCTM
http://boombustblog.com/

Who am I?

Well, I fancy myself the personification of the free thinking maverick, the ultimate non-conformist as it applies to investment and analysis. I am definitively outside the box - not your typical or stereotypical Wall Street investor. I work out of my home, not a Manhattan office. I build my own technology and perform my own research - in lieu of buying it or following the crowd. I create and follow my own macro strategies and am by definition, a contrarian to the nth degree.

Since I use my research as a tool for my own investing to actually put food on my table, I can stand behind it as doing what it is supposed too - educate, illustrate and elucidate. I do not sell advice, I am not a reporter hence do not sell stories, and I do not sell research. I am an entrepreneur who exists just outside of mainstream corporate America and Wall Street. This allows me freedom to do things that many can not. For instance, I pride myself on developing some of the highest quality research available, regardless of price. No conflicts of interest, no corporate politics, no special favors. Just the hard truth as I have found it - and believe me, my team and I do find it! I welcome any and all to peruse my blog, use my custom hacked collaborative social tools, read the articles, download the files, and make a critical comparison of the opinion referencing the situation at hand and the time stamp on the blog post to the reality both at the time of the post and the present. Hopefully, you will be as impressed with the Boom Bust as I am and our constituency.

I pay for significant information and data, and am well aware of the value of quality research. I find most currently available research lacking, in both quality and quantity. The reason why I had to create my own research staff was due to my dissatisfaction with what was currently available - to both individuals and institutions.

So here I am, creating my own research for my own investment activity. What really sets my actions apart is that I offer much of what I produce to the public without charge - free to distribute and redistribute, as long as it is left unaltered and full attribution is given to the author and owner. Why would I do such a thing when others easily charge 5 and 6 digits annually for what some may consider a lesser product? It is akin to open source analysis! My ideas and implementations are actually improved and fine tuned when bounced off of the collective intellect of the many, in lieu of that of the few - no matter how smart those few may believe themselves to be.

Very recently, I have started charging for the forensics portion of my work, which has freed up the resources to develop the site to deliver even more research for free, particularly on the global macro and opinion front. This move has allowed me to serve an more diverse constituency, which now includes the institutional consumer (ie., investment turned consumer banks, hedge funds, pensions, etc,) as well as the newbie individual investor who is just getting started - basically the two polar opposites of the investing spectrum. I am proud to announce major banks as paying clients, and brand new investors who take my book recommendations and opinions on true wealth and success to heart.

So, this is how I use my background and knowledge in new media, distributed computing, risk management, insurance, financial engineering, real estate, corporate valuation and financial analysis to pursue, analyze and capitalize on global macroeconomic opportunities. I have included a more in depth bio at the bottom of the page for those who really, really need to know more about me.

Visit his blog Boom Bust Blog.

Copyright © 2007-2009 Reggie Middleton

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