A Bubble In Risk

Bennet Sedacca, President of Atlantic Advisors LLC just sent out the following article that he graciously agreed to share. It was also posted earlier today on Minyanville. From Bennet:

I just got a good chuckle reading a Bloomberg article. Here are a couple of excerpts.

• Ukraine's largest poultry farmer, Myronivsky Hliboproduct, sold bonds for the first time, spurred by investor demand for higher yields. The company...raised $250 million to expand into beef, goose liver...at 10.25%...Moody's rates the securities B2.
• European bearing Corp in Moscow sold $150 million of 9.75% notes, its first offering to international bondholders.
• Treofan Holdings GmbH, a Raunheim, Germany-based maker of wrapping for cigarette packs sold 170 million euros of 11% bonds...boosting its ratio to more than 7 times earnings. The company probably will spend more than it earns in 2007, S & P says. The bonds have Caa ratings from Moody's and CCC+ from S & P and are trading at 101.4 cents on the euro.

Let me state here and now that this borders on lunacy, and along with the parabolic rise in emerging/developing markets, feels like too much money is chasing too few assets. After all, between M3 and foreign money, that’s $2 trillion a year in demand.

Prudence is again being penalized.

Oh by the way, according to Merrill Lynch, European junk bonds have narrowed by 14 HUNDRED BASIS POINTS to 2.35 above Treasuries.

Pardon moi???? You want me to buy what? Is this a joke or something?
It must be April’s Fools day…

According to Bloomberg, “nowhere have yields fallen more than for securities with the lowest credit ratings”. Bonds ranked Caa by Moody's and CCC by S&P (the category above default), pay 4.6 percentage points more than government securities, DOWN FROM 42 PERCENTAGE POINTS 5 YEARS AGO, Merrill says....

On top of this, REIT's now trade 250 basis points below historical yields relative to 10 year Treasuries.

The same goes for Utilities which are now yield an eye popping 3.2%, (please note sarcasm) and at 19 x earnings.

So much liquidity is being created that we are seeing a bubble develop in risk generally.
I guess I'll just have to miss this party. When it ends the hangover will be long....

Bennet Sedacca

Thanks Bennet, and not a day goes by that I wonder when it will end. There are some signs that psychology is changing in many places (more on that later tonight) but it still has not hit either the junk bond market or the stock market .... yet. Pension plans in particular seem more than willing to assume any risk.

Smack in the face Lennar Posting Quarterly Loss After Land Writedowns the California Public Employees' Retirement System ("CalPERS") picked up land that Lennar was dumping. Let's review what Lennar is saying:

Jan. 2 (Bloomberg) -- Lennar Corp., the fourth-largest U.S. homebuilder, had its first quarterly loss in at least a decade after it wrote down property investments and relinquished part of its stake in a company that controls 15,000 acres in southern California.

The loss in the fiscal fourth quarter was 88 cents to $1.28 a share after a pretax charge of as much as $500 million, Miami-based Lennar said today in a statement. Quarterly profit was $3.54 a share a year earlier.

"Market conditions continued to weaken during the fourth quarter and we have not yet seen tangible evidence of a market recovery," Chief Executive Officer Stuart Miller said in the statement.

Is land the deal of a lifetime now or was it the deal of a lifetime 10 years ago?
Consider this press release issued by Lennar: Lennar and LNR Expand Their Strategic LandSource Partnership to Include MacFarlane Partners' Venture and CalPERS.

MIAMI, Jan. 2 /PRNewswire-FirstCall/ -- Lennar Corporation (NYSE: LEN and LEN.B), one of the nation's largest homebuilders, and LNR Property Corporation ("LNR"), one of the nation's leading real estate, finance, management and development companies, announced today that they have reached an agreement to admit a new partner into their existing strategic joint venture, LandSource Communities Development LLC ("LandSource"). The new partner is MW Housing Partners, which is co-managed by MacFarlane Partners and includes the California Public Employees' Retirement System ("CalPERS").

The agreement also provides for a new non-recourse debt facility. In exchange for a 62% interest in LandSource, the MW Housing venture will contribute cash and property with a combined value of approximately $900 million. The property, which is part of an existing land bank relationship between MW Housing Partners and Lennar, is being contributed based on today's fair market value. Lennar will continue to have options to purchase those homesites at the market price at the time of the exercise.

"We are excited to be investing in such prime property in Los Angeles, a market that we have favored for its long-term growth prospects," said Victor B. MacFarlane, founder and managing principal of MacFarlane Partners. "This is a once-in-a-lifetime opportunity that few pension managers and investors have the resources and the capabilities to participate in thanks in large part to the flexibility and vision of our long time partner, CalPERS."

Exactly what sense does it make for pension plans to be picking up land being dumped by homebuilders right as one of the biggest bubbles ever is popping?

CalPERS must be thinking land prices only go up over the long haul. Someone must have forgotten to tell Japan that since Japanese land prices fell for 18 consecutive years. The hangover from this party will indeed be long.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/