CMBS Alert: Sears to Close 103 Stores—14 Locations in CMBS, Six With Elevated Risk (Retail Inferno Continues!)

The retail inferno continues, this time with retail giant Sears announcing the closure of 103 stores with 14 locations in CMBS deals. CMBS Alert – Sears to Close 103 Stores – 14 Locations in CMBS, Six With Elevated Risk

The 14 locations in CMBS deals are mostly in small markets like Rapid City, South Dakota and Taft, California.

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The Rapid City closure is hardly a surprise. It was in the BACM 2006-3 deal that has sustained millions of dollars of losses.

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Not only is the Sears property in Rapid City to be closed, Sears is late on the loan. And the Fifth Third Center in Columbus, Ohio is in foreclosure.

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This just goes to show you that it is more than a retail inferno. Even office buildings are seeing foreclosures as well.

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Do The Double-up! As Rents Rise, More Renters Turn to Doubling Up (L.A. The Worst!)

Zillow has a fascinating, yet troubling study.  It says that rent consumes a growing share of household income in many cities, some people must relocate or find ways to offset rising prices. An increasingly popular way to cut costs is by adding a roommate. Nationally, 30 percent of working-age adults—aged 23 to 65—live in doubled-up households, up from a low of 21 percent in 2005 and 23 percent in 1990.

Doubing up is a close relative of young adults continuing to live with their parents. Even though U-6 unemployment is at 8%, wage growth continues to be considerably lower than before the financial crisis. This offers a partial explanation for the doubling-up phenomenon.

Of course, doubling-up is typical is high cost of living areas like Los Angeles, San Francisco, New York City, Chicago and Washington DC. Not surprising is the doubling-up trend in Mexican border cities like El Centro California, Tucson and Yuma Arizona and El Paso and Laredo Texas.

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This nice graphic shows the trend over time, with Los Angeles leading the way.

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And yes, The Federal Reserve’s super low rate policies have contributed to rent growth (but not wage growth).

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So, let’s do the double-up with Archie Bell and the Drells from Houston Texas.

Even The Dude (aka, Jeffrey Lebowski) didn’t have to double-up with Donnie or Walter Sobchak in the film The Big Lebowski in 1998. Likely all three would have to live together if filmed in 2017.

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2017: A Review Of The Fed, Treasuries, Mortgages and Housing (Volatility and Velocity)

2017 has been an interesting year. Donald Trump was elected President and seated in January 2017. The Federal Reserve kept rates near zero with a massive balance sheet for almost all of Obama’s 8 years as President, then started to raise rates and unwind their massive balance sheet AFTER Trump was elected. Note the decline in M2 Money growth after Trump’s election.

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Inflation? Both Core PCE Price growth and Core CPI growth have declined in 2017 (yet The Fed has raised their target rate 4 times since Trump’s election but only once during Obama’s term despite declining inflation.

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The M1 Money Multiplier and M2 Money Velocity have finally stabilized.

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Mortgages? Mortgage purchase applications have declined since the financial crisis and have been slowly recovering, hampered by Dodd-Frank and CFPB rules and regulations.

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New and existing home sales? Smokin’!

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Home prices? Their YoY growth rates are continuing to rise, despite being almost 3 times YoY earnings growth for most Americans.

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How about 30 year mortgage rate and the 10 year Treasury yield? While the 10 year Treasury yield has increased over the year, the 30 year mortgage rate has declined. Although both have been increasing since early September.

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Both the 30Y-2Y and 10Y-2Y Treasury curve slopes have been flattening over the year.

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The 10 year Treasury volatility and term premium have both been declining over the year.

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With 2018 just around the corner, let’s see how many times The Fed raises their target rate and continues to unwind their balance sheet.

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S&P 500 Dividend Yield FINALLY Above US Treasury 2Y Yield (10 Years Afer)

The last time that the S&P 500 dividend yield was above the US Treasury 2Y yield was in September 2008, just prior to The Federal Reserve launching their quantitative easing (mass purchases of Treasury Notes/Bonds and Agency MBS).

For the first time since 2008, the dividend yield on the S&P 500 Index and theyield on two-year Treasury notes are essentially the same. For years after the financial crisis, the gap between the income generated from holding equities relative to government securities bolstered the case for U.S. stock markets to climb to record highs. Now, with the Federal Reserve raising interest rates, the yield on short-term Treasuries is attracting investors like BlackRock Inc.

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But Ten Years After, massive monetary stimulus is finally going home. By helicopter.

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‘Twas The Week Before Christmas: US Dollar Swaptions Dive To Lowest Point Since 2005 As US Treasury 30Y-2Y Curve Lowest Since Sept 2007

‘Twas the night week before Christmas, when all through the (financial) house
Not a creature trader was stirring, not even a mouse;

With the exception being traders sending 2Y30Y Swaptions down to their lowest level since 2005. Not to mention sending the 2Y30Y Treasury curve down to 86 basis points, the lowest since September 2007.

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Meanwhile the crypto currency Bitcoin remains above 18,000 the week before Christmas.

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Merry Christmas, one and all! Except those renting housing.

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Retail Inferno! Hennes & Mauritz (H&M) Tanks (Sales Collapse), Stock Price Decline Resembles Macy’s!

Swedish retailer H&M, operating in 62 countries with over 4,500 stores and, as of 2015, employ around 132,000 people, suffered a downward sales shock leading to a decline in their stock price.

(Bloomberg Intelligence) — The scale of the revenue miss in this key fashion quarter should initiate more radical change at the H&M brand, as profit is set to be rebased lower. The excess level of inventory needs to be rapidly reduced so the company’s fashion schedule can be reset, ideally with more short-lead time merchandise in the mix. The portfolio of stores will need more radical pruning, as shoppers are spending more online. H&M’s belated integration of online and bricks-and-mortar retail is another action that needs to be accelerated.

H&M 4Q sales have been released ahead of more-detailed earnings scheduled for Jan. 31. 

Earnings for Swedish retailer H&M, with outlets in Europe, Africa and the USA, is not a positive sign (particularly for brick and mortar commercial real estate).

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B&M’s stock price decline closely mirrors that of US retail giant Macy’s.

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It is a retail inferno globally.

Here is a photo of George Mason University students showing off their H&M bling. Or it is a photo of them celebrating the end of final exams.

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Ben & Janet’s Famous Chili Recipe: Excess Reserves Still Around After 2008 And The Fed Is Paying MORE For Banks Not To Lend

In late 2008, The Federal Reserve did something that was not so widely noticed: It started to pay interest on excess reserves, effectively paying banks not to lend.

Excess reserves are cash funds held by banks over and above the Federal Reserve’s requirements. They have grown dramatically since the financial crisis. Holding excess reserves is now much more attractive to banks because the cost of doing so is lower now that the Federal Reserve pays interest on those reserves. The fact that banks are holding excess reserves in response to the risks and interest rates that they face suggests that the reserves are not likely to cause large, unexpected increases in bank loan portfolios. However, it is not clear what banks are likely to do in the future when the perceived conditions change.

In other words, The Fed is trying to control the price and quantity of risk.

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Excess reserves have actually declined slightly since 2015 when the article was written. But the question remains as to why financial institutions are continuing to park money at The Fed. And why The Fed is encouraging it.

Loan and lease growth YoY is slower following The Great Recession than at any time since 1975.

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Part of the reason of the desire of commercial banks to park money at The Fed rather than lend it out is 1) risk (and the price of risk) and 2) compliance costs. The Dodd-Frank legislation and Elizabeth Warren’s Consumer Financial Protection Bureau have greatly increased compliance costs leading some financial institutions to avoid said costs and collect interest from The Fed instead.

What happens if the economy booms? A simple answer would be for The Fed to take away the excess reserve punch bowl. But bank lending has become so regulated (CFPB, OCC, Fed, FDIC, SEC, etc) that financial instutions may decide to continue the escape valve from actual lending.

I call excess reserves and the interest paid by The Fed to FI’s that DON’T lend … Ben and Janet’s Famous Chili recipe. If the economy does boom, I am afraid of what will happen.

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