On November 19, bonds and stocks backed by commercial real estate loans plummeted on investors’ fears the struggling U.S. economy might lead to a wave of defaults.

Big real estate companies suffered big losses: shares of Simon Property Group, the top U.S. mall operator, declined 13%; Boston Properties Inc., owner of skyscrapers and office buildings in key U.S. markets, fell 12.1%.

General Growth Properties Inc., which owns more than 200 mall properties throughout the United States, is teetering on the brink of annihilation. If the flailing company can’t come up with the $958 million of its debt that is now due, and the $3.07 billion due next year, it will have to file for bankruptcy protection.

“Ghost malls” may become a common sight around the country, with major mall developers and big-name retail chains like Linens ‘n Things and Circuit City going broke and others, such as Starbucks, closing hundreds of stores nationwide. Small businesses are even worse off as shoppers tighten their belts.

A recent Newsweek article quipped that it would “take some kind of sorcery to keep the current mix of store closings, skeletal inventories, hard-to-find sales staff and anxious consumers from turning the yuletide shopping season of 2008 into a seriously cranky Christmas. Even Santas have been getting pink-slipped.”

None of what’s happening surprises Andy Miller, a consummate real estate entrepreneur and friend of Doug Casey’s, who presented his outlook on the commercial real estate market in the September edition of The Casey Report.

Miller on Retail Shopping Centers:
“Retail  are the most exposed product type. For example, we have a grocery-anchored shopping center in Phoenix that’s about 94% occupied. We’ve been trying to sell it for the last nine months. We’ve had it under contract probably four times. Each time, it’s fallen through because the buyers were unable to find a lender. The lack of liquidity is particularly acute in the commercial markets.

“Most commercial mortgages that were written over the last 10 years for most product types, except apartments, were done by conduits, and they were done by asset-backed finance securitizations, CDOs, etc. The overwhelming number of those conduits are now either out of the market or shut down. There’s going to be a tremendous upheaval in the commercial market relative to the fact that there’s almost no conduit money available anymore.”

Miller on Office Space:
“The office market, of course, is eroding. While I expect the central business districts around the 20 top cities in the country to probably be relatively stable in terms of office occupancy, I think the suburban markets are going to get creamed.”

Miller on Warehouses:
“Warehouses are bad. They’re very flat. Users are consolidating; they’re not expanding.”

Miller on Hotels:
“I’d also be wary of hotels. The hotel business is proliferating right now, in a way that I’ve never seen. There are so many new hotels being built right now nationally that there’s no way, even in good times, that I think they could sustain occupancy. A lot of these hotels now have created new flags and they’re putting them in multiple locations in most big cities. So there’s been a tremendous proliferation of hotels and, with high air fares and high gas costs, there’s no question that that’s going to be a bad place to be.”

Miller on the Real Estate Bubble:
“There is no historical comparison to the situation today. Not even the Great Depression was like this. I believe we’ve just lived through the greatest expansion of capital in the history of planet Earth, in the history of mankind.

“And this happened really all over about 12 or 13 years, this gigantic, dynamic expansion of money. There is no precedent for this. One truth about cycles is that the downward part of the cycle is usually quicker and more painful than the upward swing. We didn’t get into this thing overnight. It took many years, and we are not going to get out of it overnight. It’s going to take many years to unwind.”

Waiting for the other shoe to drop is an uncomfortable position to be in. Thankfully, there are a number of lifelines we as investors can grab on to, to avoid getting sucked into the whirlpool of declining asset values and a declining dollar… and we should take every chance we get to use them.

How well you do in the unfolding crisis will depend on how well informed you are. “Making the trend your friend” is now more critical than ever to financially survive the onslaught of tidal waves rocking the U.S. economy. The Casey Report diligently analyzes major economic trends and provides actionable advice on how to profit from the  “market riptides” – with the goal of preserving and multiplying your assets while others capsize in the stormy seas. Learn more here.

Olivier Garret, Casey Research

Source: Commercial Real Estate – the Next Show to Drop

You see, most investors gobble the answers up, thinking, “If the Big Money is doing it, maybe I should, too.”

But I read the Big Money poll in exactly the opposite way… I know when the Big Money guys all believe the same thing, chances are great the trade is “full” already.

So if you read the Big Money poll right, it can actually be quite profitable. Let me explain…

In mid-March, Barron’s e-mailed the poll to money managers. About 120 replied, and the results came out over the weekend.

The most hated asset class (not surprisingly) was real estate investments. Only 8.1% of money managers considered themselves bullish on real estate. And the most loved class was Latin American stocks… Only 13.8% of money managers were bearish on Latin American stocks.

The “untrained” reader might take this to mean the right trade is to buy Latin stocks and sell real estate stocks.

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Funny, then, that real estate stocks are now the best-performing sector this year… Simon Property Group – the benchmark real estate stock – is up more than 20% year-to-date.

Meanwhile, the Latin American Discovery Fund, a collection of South American blue chips, is down for the year.

How can this be? The answer is simple…

When all the money managers are bearish, there’s no one left to sell that stock… With only 8.1% of money managers bullish on real estate stocks when the poll was taken in mid-March, there was nobody left to sell real estate stocks. With no one left to sell, they couldn’t go down any farther.

So here’s what happened: On March 14, Simon Property Group traded for around $86. Now – just six weeks later – it’s at $105.

On the other hand, the Latin American Discovery Fund peaked two days before March started, and it hasn’t done much since. It was everyone’s favorite in March… Why hasn’t it gone up? In short, there’s nobody left to buy – only 13.8% of money managers were bearish on Latin stocks when the Big Money poll was taken. Everyone who wanted to buy was already in.

Here’s the key: You have to wait for the extremes in sentiment. The old saying is, “The crowd is wrong at the extremes, and right in between.”

So let’s look at another example from the Big Money poll… One result was as lopsided as I’ve ever seen: Only 3.6% of investors are bullish on 10-year Treasury bonds. That means nearly all money managers believe long-term interest rates are headed higher.

With long-term interest rates currently below 4%, investors think rates can’t go any lower. After all, they haven’t seen them lower than that in their lifetimes.

But they’re ignoring history… Japan’s property bust started in 1990. Interest rates were “normal” then – around 6% to 7%. But as the property bust went on and on, long-term interest rates fell to 3% by 1995… and actually fell below 1% in 2003. Even today, they’re around 1.5%. Incredible!

All the talk is of inflation… and everyone expects interest rates to head higher. But don’t go betting the farm just yet. This trade is already full, and long-term interest rates could surprise you and head much lower. Already, interest rates on 10-year Treasuries have fallen from more than 5% in the summer of 2006 to below 4% now.

If you want to follow the crowd and do the “ordinary” thing, bet against real estate stocks and bet that interest rates will head higher. But by doing the ordinary thing, you’re destined for ordinary returns. If you want “extraordinary” returns, you must be willing to do something extraordinary.

One of my favorite hunting grounds for doing something extraordinary is Barron’s Big Money poll…

Good investing,

Steve

P.S. Talk about doing something extraordinary… In the latest issue of my letter, Sjuggerud Confidential, which came out earlier this month, I recommended a safe bank, with no exposure to U.S. real estate. We’re already up more than 20% – in less than four weeks! And I still think it’s a great buy. To learn more about this idea, click here.