Recently I received an interesting comment from Hanno here at the Phil Town blog:
It seems that we reached the Ceiling right now. If we look at the Dow in a 10 year history chart, we can see, that it was going down for over a year. This rebound we are seeing now is not lasting. The charts show it in the little time-frame: If the value goes down straight and also very much than there is always a counter motion following. This is what we can see now with the big indices. The 8000 points at the Dow seem to be the Ceiling of it. Well, I think, that we will going to hit the 200 day MA in the next 2-3 months. So we will be in a sideway until then. If this happens, than this could be the sign of a lasting rebound in the next half year from then. But mention folks, this is just my opinion. And I am not sure but this mess could be finished at the end of this year. We will see.
Phil Town's response:
We've been right on about 8000 as a ceiling. There are ways to make money when you have that situation, but they more advanced. We'll get in to that sort of thing in the future sometime, but for right now the 8000 ceiling is holding.
Meanwhile, the banks are doing better, but commercial real estate is the next shoe and it's going to drop this year. Banks are carrying big portfolios of commercial real estate loans and no one knows what they are worth right now.
Here's the problem:
What happens if a small business is having cash flow problems? They don't pay their rent. They don't leave either. They are just hanging on trying to make it work. The landlord who owns the office building doesn't have anyone knocking on his door to rent, so he's giving the business owner some slack. But he knows if the rents aren't paid, he might not be able to make his mortgage payment on the entire building.
If that happens, the mortgage holder doesn't want to foreclose in this market, so they put it on their books as a non-performing loan. But what does that mean? What is the actual value of the loan? Is it still worth what the bank lent, or is it going to be impossible to collect it and the real estate is worth less than the loan value (like in a lot of residential real estate)?
It's a lot harder to know the answer to those questions in commercial real estate because there aren't so many comparable properties and because the size of the commercial properties makes them much slower to sell, even in a good real estate market.
The recent "stress test" on banks required someone to make some assumptions about the values of commercial real estate. If the assumptions are wrong, the stress test is worthless. Gee, do you think the assumptions were somewhat optimistic in nature right now, or did the government auditors make dire assumptions about the future?
I'm guessing they fudged toward an optimistic future. Which means the banks could be in much worse shape then reported so far.
We have no way of knowing, since we aren't going to go evaluate the real estate building by building to see the value that underlies those loans. So if you are into banking stocks, be very wary. I'd be trading these rather than stockpiling. There could be a government takeover of the banking industry yet, and that means a total shareholder wipeout.
Now go play.
