With retail losses continuing to accelerate and vacancy rates skyrocketing, malls are going to be one of the biggest losers from the consumer spending slowdown…

Here’s why our shopping malls, and by extension the commercial real estate market, aren’t going to be moving anywhere but down over the next few months – and what you can do about it in the meantime.

Don’t Be Fooled By Housing Starts Recent Uptick…

Much has been made of the recent uptick in housing starts in May, but don’t be fooled – this is simply seasonal. In the northern half of the country, foundations can’t be dug during the winter months, so there is always a “spring surge” in housing starts.

The Obama administration predicted that without the recovery plan, unemployment would peak around 9% in 2010. With the plan in place, the estimate was 8%, and that we’d hit it this year…

• The official Bureau of Labor Statistics number is at 9.4%. But even though unemployment rates are easing slightly, the overall number of unemployed is still rising.
• And it gets even worse when you throw in the 2.2 million additional people that are so discouraged they’ve quit looking for work, and today’s number jumps to 10.8%. These individuals haven’t even shown up on the rolls yet.
• With few companies announcing even minimal hiring plans, it’s highly likely that the ranks of the unemployed will continue to swell to 11% to 12% sometime in 2010.

What does this have to do with commercial real estate and shopping malls? Plenty. As I’ve said before, it all starts with the consumer.

• In America, the consumer’s long-term contribution to our Gross Domestic Product (GDP) is around 65%.
• But for the last five years or so, it’s been over 70%.
• That is, until the fourth quarter of 2008, when it dropped off a cliff.

And therein lies the problem: Less employed workers means less discretionary spending, less homes being built, bought and sold, less trips (or none) to the local mall, less warehouses needed, less manufacturing, less transportation… all resulting in a big pullback in GDP.

Consumers are spending less, not more. When they do spend, it’s on staples: food, gas and clothing.

The normally big-spending teenage segment is currently experiencing a 22.7% unemployment rate. So instead of going to their former favorite hangouts – the shopping malls – they’re hanging out at each other’s houses. (I know this to be true, as my son is entertaining a group of friends at our house as I write this.)

Are Fears of Commercial Real Estate Fallouts Overblown?

Many so-called “experts” in the commercial real estate field have said the fear of commercial real estate fallouts and failures are overblown… that it won’t be as nearly as bad as people like myself are predicting.

They’re dead wrong.

They’re ignoring the fact that there’s always a lag between when the economy heads south and when commercial real estate does. Let’s face it: Some stores can coast for a few months – or even a year – while they wait for a pickup in business. But that pickup isn’t coming anytime soon.

The reality is that many mall-based stores haven’t renewed their leases – their lack of income is forcing their hand. Many others are underwater financially, and only months away from closing.

When national chain Ritz Camera filed for Chapter 11 bankruptcy protection, 300 stores in malls all across the country immediately closed. The result isn’t hard to picture.

• A report from the New York-based research firm Ries, Inc. indicates that retail tenants vacated a 10-year high 8.7 million square feet of retail space in just the first quarter of 2009.
• That compares to 8.6 million square feet… for all of 2008.
• Kyle McLaughlin, an analyst at Ries, says that vacancy rates at strip malls, neighborhood centers and regional malls are increasing at rates not seen in 30 years. “We’ve never really seen deterioration of this order in occupied space since 1980. We don’t see much in expectations for improvement throughout the rest of this year and next year.”

Reis indicated that their forecast assumes positive job growth and an increase in consumer spending starting in 2010.

Say what?

Here’s the problem with that assessment: It’s ignoring what’s really going on outside their offices – unemployment is still rising, and that means fewer consumers spending less money.

Don’t look to the emerging markets to bail us out, either. The Chinese, Brazilians, Russians and Indians can’t just run down to our local malls to shop.

The problem is made worse by vacant storefronts, which hurt the few remaining stores. When the stores on either side of a remaining store closes, less traffic comes by and, well, you get the picture.

All this puts shopping mall owners and landlords in a big financial squeeze play: They’re forced to drop rents at a time when less money is coming in due to rising vacancies.

Commercial Real Estate Loans Mature - Bigger Problems Arise

The problem is about to get very, very big: Between now and 2011, as much as $814 billion in commercial real estate loans will mature – and need to be refinanced. The problem is that the credit markets are still too tight for most commercial projects.

Most banks have tightened their lending standards, reduced the amount they are willing to lend and significantly reduced the value of the collateral (malls). This leaves many owners with little choice but to turn to the Feds.

Back in May – and with much fanfare – the Federal government announced it would soon be expanding its Term Asset-Backed Securities Loan Facility (TALF). It now plans to include existing securities backed by loans for apartment buildings, office complexes, shopping centers and other commercial property.

But these programs aren’t an industry panacea. If you read the fine print, they provide backing only if the securities are rated AAA by major rating agencies. This excludes just about all the needy real estate – and the REITs that own it – from participating in the program.

How to Play the Commercial Real Estate Fallout

So, how do we play the commercial real estate fallout? The bottom-line is this: Many shopping malls in this country are simply going to disappear. Supply and demand will ultimately determine how many. All this bodes well for really big operators like Kimco Realty (NYSE: KIM) and Simon Property Group (NYSE: SPG), long-term plays that are large enough to weather the lengthy storm.

But for short-term investors looking to pick up some companies on the bottom, beware of going long just yet: While the market has already baked in a lot of bad news, uncertainties surrounding any additional big chain bankruptcies persist.

That means many REITs still have further to fall.

If you’re looking for an investment option that plays this angle, a dropping real estate market bodes well for ProShares UltraShort Real Estate (NYSE: SRS). It seeks investment results equal to twice the inverse of the daily performance of the Dow Jones U.S. Real Estate Index.

In the coming weeks, I’ll take a look at the office and industrial property side of commercial real estate that, unfortunately, isn’t much better off than the malls.

Good investing,

David Fessler

Source: The Commercial Real Estate Fallout: Profiting From the Death of the Shopping Mall

Summer begins in 3 days. We can hardly wait. We predict it will be a killer.

Several interesting things are likely to happen this summer.

1) Unemployment rates will go up.

2) Rising joblessness will increase rates of defaults, foreclosures, and bankruptcies. Not just at the consumer level – but throughout the system… including banks, states, businesses, as well as households.

3) The stock market will take a dive as earnings fall and investors realize that there will be no quick recovery.

Oh… and one more thing: US bonds could collapse. But watch out; here’s where it gets tricky. Another swoon in the stock market could send investors running for the smelling salts in the bond market. A collapse of bond prices, on the other hand, could send them helter-skelter into stocks.

Yesterday, the Dow rose 7 points. Oil held at $71. The dollar lost a little ground – to $1.39 per euro. And gold added 3 bucks.

It is impossible to predict what will happen – or when – in the markets. So let us turn our attention to the real economy. Here, we see the picture more clearly: We’re in a depression. We write depression with a small ‘d.’ We’re saving the big one for later.

Few economists or analysts will tell you we’re in a depression. They’re looking at “green shoots” and rising trendlines. They’d do better to read a little history. Such as the history of the Great Depression.

Martin Wolf in the Financial Times (reporting the results of a study by two American professors):

“First, global industrial output tracks the decline in industrial output during the Great Depression horrifyingly closely. Within Europe, the decline in the industrial output of France and Italy has been worse than at this point in the 1930s, while that of the UK and Germany is much the same. The declines in the US and Canada are also close to those in the 1930s. But Japan’s industrial collapse has been far worse than in the 1930s, despite a very recent recovery.

“Second, the collapse in the volume of world trade has been far worse than during the first year of the Great Depression. Indeed, the decline in world trade in the first year is equal to that in the first two years of the Great Depression. This is not because of protection, but because of collapsing demand for manufactures.

“Third, despite the recent bounce, the decline in world stock markets is far bigger than in the corresponding period of the Great Depression.

“The two authors sum up starkly: “Globally we are tracking or doing even worse than the Great Depression … This is a Depression-sized event.”

Yesterday, we proposed two sine qua non for a new boom. Either the feds revive the old economy – by getting people to borrow and spend more money. Or, the mistakes of the past must be corrected… whereupon new investment and growth can take place. While the free market is busy working on the latter, central banks and national governments all over the world are trying to stop it. They’ve got the voters and campaign contributors to answer to, none of whom wants to get what he deserves. Instead, they’re hoping to revive the Bubble Epoque. Citizens are already up to their necks in debt; but the feds raise the water level!

This flood of fed liquidity seems to be raising boats and animal spirits among speculators. But it is doing nothing to revive the real economy.

“Consumer Costs Fall Most in Six Decades,” reports Bloomberg. Europe is already in deflation. America is not far behind. We had a hard time following the Bloomberg report. It said consumer prices were 1.3% below those of 12 months ago. We don’t believe that’s true. What we think Bloomberg meant to say was that prices are increasing at the slowest pace in 6 decades… but, for the moment, inflation is still (barely) positive.

With prices falling, the last thing the feds are worrying about is inflation. Except that there isn’t any. And they’re going to worry a lot more over the summer, when the hot sun beats down on a lifeless economy and it becomes obvious that their revival efforts have failed.

Meanwhile, Theo Casey’s predicting it the other way. He’s predicting an “H-Bomb” ahead… “H” for hyper-inflation.

And more thoughts for the summer ahead:

*** Global commerce has fallen in line with the Great Depression. That means producers don’t need to produce so much… and don’t need so many people to produce it. Jobs are lost. And then the people who lose their jobs don’t go out to restaurants and malls so much… so more jobs are lost.

These job losses take time to show up. And then they take time to “ripen.” People tend to have a little something set aside for a rainy day – or at least, unemployment compensation. But after a few weeks of stormy weather, the reserves are exhausted. Then… they have to cut back much more.

USA Today asked people: “If you lost your job, how long could you afford to pay for your own health insurance?” More than 65% of respondents said they could only manage for 6 months or less.

In America “there hasn’t been a shock like this since the de-mobilization of millions of soldiers following WWII: something like 3 million unemployed people are going to fall out of the safety net in the third quarter. With their families, that’s about 10 million people who will sink suddenly into deep poverty,” says GEAB a private research service headquartered in Paris. The group anticipates a “Very Great Depression” coming to the US.

More than three million jobs have been lost in the US during the last 5 months. As these out-of-work cases ripen, there will be some rotten fruit falling to ground.

There are also the millions who are working fewer hours and earning less money. In fact, the number of hours worked per week has fallen to a record low.

Where do people without jobs, without incomes, without savings – and without benefits – shop? What money do they spend? How does a consumer economy launch a boom when consumers have less money to spend?

These questions have obvious answers and obvious implications: there ain’t going to be any consumer spending boom in the USA… not this summer… and probably not for many summers to come. Martin Wolf explains why:

“Robust private sector demand will return only once the balance sheets of over-indebted households, overborrowed businesses and undercapitalised financial sectors are repaired or when countries with high savings rates consume or invest more. None of this is likely to be quick. Indeed, it is far more likely to take years, given the extraordinary debt accumulations of the past decade. Over the past two quarters, for example, US households repaid just 3.1 per cent of their debt. Deleveraging is a lengthy process.” .

If we assume that debt levels need to go back to where they were before the Bubble Epoque… well, let’s say to 200% of GDP just to make the maths easy… that means 170% of GDP worth of debt needs to be paid off. That’s $20 trillion, in round numbers – or about 40% of the total. At 6% per year, even if households kept paying off debt at the current rate it would still take nearly 7 years to get household debt down to pre-bubble levels.

Then, of course, there is the government debt – now expanding faster than ever. The US has the biggest deficit – even as a percentage of GDP – of any serious country in the world. The US deficit is 12% or 13% of GDP. Compare that to Russia at 2.6%…. Spain at 6%… France at 5%… Brazil at 1.3%…. Even Argentina has a much smaller deficit than the US – only 3.6% of GDP.

(More on the pampas tomorrow….)

But don’t worry about it. The ‘Committee to Save the World, Part II’ is on the case. Geithner, Bernanke and Summers are staying in the office throughout the hot months. They kept us out of trouble so far, didn’t they?

So enjoy the beach!

*** The US has entered the Third Stage of a great nation. The Political Stage.

In the late 20th century, power and money moved from the banks of the Monongahela to the banks of the Hudson. Now they’re moving again – to the banks of the Potomac. Washington calls the shots.

“Obama Blueprints Deepen Federal Role in Markets,” says a headline in yesterday’s Washington Post.

Of course, this change didn’t happen overnight. George W. Bush was a trailblazer – turning ‘conservatives!’ into big spending activists. And the business community – particularly the banks – saw it coming and got ready.

In 2001 the banking industry spent $5 million on lobbying in Washington. The total went up every year. By 2008, they were spending $20 million. Campaign contributions from bankers increased too… from only $4 million from the bankers’ political action committees in 2000 to $8 million last year.

Judging from the bailouts given to Wall Street last year, this investment paid off handsomely.

Source: Killer Summer Ahead

Martin Hutchinson in Money Morning blames Fed inspired inflation and speculators:

The reason for this intense advance in commodity prices is that the Fed and its European counterpart have been pumping money into their respective economies to prevent the collapse of several major banks. The St. Louis Fed’s “Money of Zero Maturity” (the best broad money-supply measure left over since the central bank stopped reporting M3 money-supply statistics in March 2006), is up at an annual rate of 17.6% during the last six months. In Europe, Euro M3 is up at an annual rate of 10.8% during the same period – still double the growth seen in nominal gross domestic product (GDP).

In the key emerging markets, the money supply has been rising even faster – 19% in China over the past year, and 21% in India. Not surprisingly, those countries’ inflation rates are taking off, with India into double digits and China quickly getting there.

He goes on to say:

It’s fairly clear to me that concerted speculation by hedge funds and pension funds is what’s been pushing up oil prices. But that may be playing out – and reaching its limit – as the huge price increases we’ve seen in “black gold” over the past year is finally dampening consumer spending both here in the United States and in other key markets worldwide…

Dave Gonigam in Daily Reckoning sees oil supply as the problem:

…Oh, and those darn speculators. OPEC loves to blame them, and has blamed them, going at least as far back as $92 oil eight months ago.

BP (NYSE: BP) chief Tony Hayward is having none of that, calling the notion of speculators driving up the oil price a “myth.” More relevant, he told the World Petroleum Congress, is that “supply is not responding adequately to rising demand.” But then Hayward goes off the rails when, according to Reuters:

He added that politics rather than geology was the reason. “The problems are above ground not below it,” he said.

Now it’s true enough, as Hayward complains, that OPEC nations don’t like having Western oil majors like BP working OPEC oil fields the way they did in decades gone by. But the fact oil-rich nations are giving BP less access than they used to doesn’t change the fact that the world’s biggest oil fields are in decline, and new ones aren’t coming online nearly fast enough to pick up the slack. I can understand why OPEC doesn’t want to fess up to that reality, but why is Tony Hayward so reluctant?

Surely, these three factors of inflation, speculators, and lagging supply are the primary causes of rapidly rising prices. But, will any of these factors fall off or fade in the near future? Speculation is most likely to wain according to Hutchinson. Demand may well slump with consumer spending, but inflation will likely worsen… Bill Bonner says:

Talk is cheap. It’s action that is dear. And the action the Fed needs to take – raising rates – will be so potentially costly for the lame U.S. economy that Bernanke and Co. are afraid to do it. They’re hoping inflation will go away so they can continue the battle against the slump, without having to worry about their unprotected flanks. Most likely, they will make a gesture towards raising rates – perhaps a quarter of a point. But then, when the mob starts howling for his head, Ben Bernanke will drop them again.

It’s evident that the Fed does not have the will or the tools to ward-off looming inflation. With inflation eating your dollars and commodities most likely set to rise higher, there are still many opportunities to profit…

Implications

Martin Hutchinson says:

Investing in the late stages of a bubble is highly speculative. Nevertheless, I reiterate my prediction of a few months ago that gold will reach $1,500 an ounce. Even if the Fed begins to act against inflation in August, it is very unlikely that its initial actions will be effective. Don’t forget that in the last great inflationary bubble of 1980, gold hit a level that’s the equivalent of $2,300 an ounce in today’s money.

I would consider SPDR Gold Trust (formerly StreetTracks Gold Trust) shares (GLD) about the most efficient way of getting a pure gold play. As an alternative, you might consider a silver investment: The metal is currently trading at less than 15% of its 1980 high, the equivalent of $130 per ounce. If that’s a move you like, the iShares Silver Trust ETF (SLV) seems the best way to play silver directly.

Also see other commodity ETFs such as:

S&P GSCI(TM) Commodity Indexed Trust (GSG)

PowerShares DB Agriculture (DBA)

Market Vectors Global Agribusiness (MOO)

The direction of interest rates was on everyone’s mind. Dallas Federal Reserve President Richard Fisher, who has voted against the Fed’s three most-recent rate cuts, hinted in a Wednesday speech that the central bank is done cutting interest rates and is prepared to raise them.

“If inflationary developments and, more important, inflation expectations continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic economic scenario,” Fisher said.

“Those remarks made it more evident that the Fed’s propensity to take the overnight funds rate below 2% [is] smaller and ever smaller,” wrote Dennis Gartman, publisher of the Gartman Letter.

The job market continues to be difficult. The Labor Department reported that initial claims for state unemployment benefits rose 4,000 to 372,000 in the week ended May 24. While, according to Bear Stearns economists, claims haven’t moved into “recession territory … they continue to bounce around close to the 375,000 level that we believe is consistent with mildly recessionary conditions.”

Source: Dollar Advances vs. Euro – Central Banker Hints at Rate Hikes