from Cesar at Valance:
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On Fri, Aug 8, 2008 at 2:47 PM, Cesar writes:
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Hope they don’t dig it up and take it home!
Lost Sovereignity
Oil-rich Fund Eyeing Foreclosed US Homes
By Teri Buhl
There’s a new land grab starting in America.
Foreign money, which up to now has focused its attention on investing in iconic commercial real estate – like Barneys New York and the Chrysler Building – is now moving to scoop up tens of thousands of discounted foreclosed homes across the country.
One sovereign fund, said to have earmarked $29 billion to purchase foreclosed residential real estate, recently hired a West Coast mortgage broker and is starting to search for bargains, The Post has learned.
The search, which is being carried out, in part, by Field Check Group mortgage consultant Mark Hanson, who was retained by the broker, Steve Iversen, is concentrating on single- and multi-family REO (real estate owned) homes, or homes that have already been taken over by the mortgagee.
Neither Iversen nor Hanson would disclose the name of the client, but sources told The Post it’s a sovereign fund.
The unidentified fund joins individual US investors, hedge funds and Wall Street banks in kicking the tires of REO homes, which have fallen in value so much that they are now tempting investments.
A sovereign fund would have two distinct advantages over other investors – the depressed value of the US dollar makes the homes a bargain, and sovereign funds have deeper pockets.
The sovereign fund of Abu Dhabi, for example, has a reported $875 billion in assets, while Norway has $391 billion, Singapore has $303 billion and Kuwait has $264 billion in their sovereign funds, which are funded by proceeds from oil sales.
The Abu Dhabi Investment Authority is expected to announce next month what type of US distressed assets they will be investing in and real estate is at the top of the list, according to a report in Financial Times last week.
ADIA did not respond to an e-mail question about REO investments.
So far, prices on bulk sales of REO properties vary based on location and are selling from 60 cents to 80 cents on the dollar. Hanson started out offering 40 cents on the dollar for about $2.5 billion worth of California properties owned by IndyMac and Washington Mutual but was turned down. The banks refused to comment.
Hanson is now willing to pay 50 cents to 60 cents on the dollar for a collection of California REOs worth at least $500 million.
In fact, this week Hanson’s team negotiated a $2 billion package mixed with homes across the country for 31 cents on the dollar. While progress seems slow, Hanson reminds us this is only a nine-month old industry.
Some market experts think such deeply discounted REOs, like the deal Hanson just closed, are more fiction than fact.
“The size and discount of that type of deal isn’t the norm yet,” said Robert Pardes, with Recourse Recovery Management Services, a provider of mortgage advisory services.
“The critical mass of bulk REO is in well-capitalized institutions that don’t need to sell yet in bulk at a deep discount because they are better off not taking substantial hits to the capital just to get the assets off their books,”
This may change, should the market become more crowded with bank failures and distressed institutions, he said.
Enoch Lawrence, senior vice president of CB Richard Ellis, says “This type of bulk buy would make an impact on the market. They are in a unique position because they have a long time horizon to invest and a cheap cost of capital. It’s actually a perfect time for them to acquire these REO assets.”
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My current assessment is that the crude sell-off has caused the USD’s strength.
Lower crude prices make the USD ‘harder to get’ as oil producers get fewer USD for the same volume of crude (and product) exports to the US.
Likewise, this also brings down the US trade gap which is about half directly related to oil prices, so nonresidents have fewer USD to meet their USD financial asset savings desires.
Crude has been brought down by technical selling, which also brought with it technical buying of USD as trend following trading positions were unwound.
The crude market has gone into contango as would be expected with a futures sell off and tight inventories.
Tighter US credit conditions made the USD ‘harder to get’ while increased deficit spending makes the USD ‘easier to get’ resulting in GDP muddling through at modest rates of growth.
The Russian invasion probably helped the USD today.
Eurozone credit quality erosion with the onset of intensified economic weakness may be triggering an exit from the euro. The lowest risk euro financial assets are the national governments which carry similar risk to US States, and are vulnerable in a slowdown that forces increasing national budget deficits that are already in what looks like ‘ponzi’ for credit sensitive agents.
Eurozone bank deposit insurance is not credible and therefore the payment system itself vulnerable to an economic slowdown.
With the Russian army on the move, public and private portfolios may not want to hold the debt of the eurozone national governments that they accumulated when diversifying reserves from the USD.
I expect the Saudis to resume hiking crude prices once the selling wave has passed. I don’t think there has been an increase in net supply sufficient to dislodge them from acting as swing producer. And I also expect them to continue to spend their elevated revenues on real goods and services to keep the west muddling through at positive but sub-trend growth.
And the Russian invasion will linger on and help support the USD as a safe haven in the near-term
Comments about this post from email:
MIKE:
Again, its very likely you have permanently damaged demand at prices that are still over 100-
It’s possible the growth of crude consumption has slowed, but I still think it’s doubtful if consumption had declined enough to dislodge Saudi price control. July numbers still not out yet.
in addition asset alligators around the world are actually or synthetically short the dollar after 8 years of dollar selling…
Agreed. The question is the balance of the technicals, and if the CBs no longer buying USD has been absorbed by others.
For now, yes, short covering has mopped up the extra USD sloshing around from our trade gap, but it’s still maybe $50 billion per month that has to get placed. Not impossible for non-government entities to take it but it’s a tall order.
The Russian invasion helps a lot as well. That could be a much more important force than markets realize. Looks like a move to further control world energy supplies. A middle-eastern nation could be on the bear’s menu. I doubt the US could do anything about a Russian takeover of another neighbor. Certainly not go to war with Russia. and they know it.
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Government spending kicking in with 2007 spending that was delayed to 2008:
Topical article: The GOP’s December Surprise by James K. Galbraith
Durable Goods Orders Rise Unexpectedly
by Michael M. Grynbaum
A separate report showed that orders for big-ticket items rose last month, beating economists’ expectations. A surge in export orders and *investment in military-related products* sent durable goods orders up 0.8 percent in June from a revised 0.1 percent in May, the Commerce Department said. Excluding orders for military-related goods, orders were up only 0.1 percent.
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Looks like they buckled quickly to get the rest of the bill through ASAP.
Pension fund provisions out of House bill
by Doug Halonen
A bill in the House Agriculture Committee that would deal with commodity speculation was dramatically revised today to delete provisions in a previous draft that would have barred pension funds from investing in agricultural and energy commodities and engaging in equity and interest rate swaps, a committee aide said.
“(The) pension provisions are out of the bill,” the aide, who asked not to be identified, wrote in an e-mail response to a P&I Daily inquiry. The aide could not say why the provisions were removed.
Pension industry advocates said that the threat of the bans  included in the draft bill that was being circulated Wednesday  was met by significant opposition from pension fund representatives.
The draft and the revised bill were both sponsored by Rep. Collin Peterson, D-Minn. The committee will vote on the bill this afternoon, according to the committee.
“It’s going to be a pretty innocuous bill,” said one pension industry lobbyist, who asked not to be identified by name. “We’re not sweating it for sure.”
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Just saw that the house just rejected this.
Looks like it was one more reason for technical weakness in crude, along with the vote to limit speculation and the oil storage company’s futures and cash market issues and bankruptcy.
White House threatens veto on bill to sell govt oil
by Tabassum Zakaria
(Reuters) The White House on Thursday threatened to veto legislation that would require the government to sell 10 percent of the oil in the nation’s emergency petroleum stockpile.
The House of Representatives was expected to vote on the bill later on Thursday. Democrats hope the legislation will lower oil prices by putting on the market more of the Strategic Petroleum Reserve’s light, sweet crude that is sought by refiners.
“Drawing down our emergency oil reserve in the absence of a severe energy disruption is counter to the purpose of the SPR, and offers the nation a quick fix instead of much needed long-term, responsible energy solutions,” the White House said in a statement.
The bill would require the government to sell 10 percent of the emergency stockpile’s oil, or 70 million barrels, in the open market. About 40 percent of the stockpile’s oil is light sweet crude.
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Karim writes:
AMEX notes consumer spending slowed in latter part of quarter, suggesting effect of fiscal impulse waning. CAT driven by emerging market strength, states U.S. and Europe are two weakest regions, and expects rate cuts by Fed and ECB by year-end.
AMEX
CAT
Right, weak domestic demand for sure. But note the last few lines that represent the booming exports even though domestic economies around the world are slowing.
That’s what happens when they spend their accumulated hoard of USD here and spend less at home as they try to get rid of their USD hoards. This doesn’t stop until their holdings of USD fall to desired levels.
I still see continued domestic weakness with GDP muddling through due to exports and government spending.
And ever higher prices pouring in through the import/export channel.
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Too Big to Fail?
by Peter S Goodman
Using public money to spare Fannie and Freddie would increase the public debt, which now exceeds $9.4 trillion. The United States has been financing itself by leaning heavily on foreigners, particularly China, Japan and the oil-rich nations of the Persian Gulf.
This is ridiculous, of course. The US, like any nation with its own non-convertible currency, is best thought of as spending first, and then borrowing and/or collecting taxes.
Were they to become worried that the United States might not be able to pay up, that would force the Treasury to offer higher rates of interest for its next tranche of bonds.
Also ridiculous. Japan had total debt of 150% of GDP, 7% annual deficits, and were downgraded below Botswana, and they sold their 3 month bills at about 0.0001% and 10 year securities at yields well below 1% while the BOJ voted to keep rates at 0%. (Nor did their currency collapse.)
The CB sets the rate by voice vote.
And that would increase the interest rates that Americans must pay for houses and cars, putting a drag on economic growth.
As above.
For one thing, this argument goes, taxpayers  who now confront plunging house prices, a drop on Wall Street and soaring costs for food and fuel  will ultimately pay the costs. To finance a bailout, the government can either pull more money from citizens directly,
Yes, taxing takes money directly, and it’s contradictionary.
But when the government sells securities they merely provide interest bearing financial assets (treasury securities) for non-interest bearing financial assets (bank deposits at the Fed). Net financial assets and nominal wealth are unchanged.
or the Fed can print more money  a step that encourages further inflation.
This is inapplicable.
There is no distinction between ‘printing money’ and some/any other way government spends.
The term ‘printing money’ refers to convertible currency regimes only, where there is a ratio of bill printed to reserves backing that convertible currency.
Skip to next paragraph “They are going to raise the cost of living for every American,”
True, that’s going up!
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