S&P Turns Bullish on REIT's; Justification for CRE Upgrades?

In what appears to be a thinly veiled justification for recent ratings vacillations on commercial mortgage debt, S&P has just released an uber-bullish opinion of REIT's - specifically those that have accumulated large shopping center portfolios. The Mcgraw-Hill (MHP) subsidiary cites, among other supposedly positive factors, the "diversification" of REIT's tenants and locales as a reason to plow your money into the stocks of these Trusts. S&P identifies this positive aspect as being contrary to the experience of developers who, according to S&P, tend to own/operate single tenant locations; the implication being one of having "all your eggs in one basket". The most bizarre comment though, was that "local opposition" to developers seeking approval for new retail centers would benefit these REIT's by preventing neighboring competition. Such a statement caused us to wonder who, exactly, is charging ahead with plans to build new shopping centers right now? And where would the funding come from, especially for these "small developers" that S&P is speaking of.

That this note lacks of any sound reasoning or logic is not surprising. Most likely, S&P is painfully aware of the criticism it has received for it's sudden about face on commercial mortgage debt; specifically the fact that they are choosing to upgrade these securities to AAA status - for no apparent reason, and actually in defiance of what every fundamental indicator is telling the world at present. We wouldn't be surprised to see S&P pepper the world with more bullish CRE opinions in the near future, as they struggle oh so desperately to justify the non-sensible - and likely politically strong-armed - re-labeling of struggling debt to AAA. Sphere: Related Content

Is Uncle Sam Creditworthy?

This is a somewhat difficult question to answer, as it is questionable whether any truly objective means of evaluating the creditworthiness of an individual/corporation/nation even exists. However, given that the investment community tends to rely upon a letter based rating system, developed and implemented by a small group of "ratings agencies", we will comment on Uncle Sam from this pseudo-objective standpoint.

Many of the inquisitive minds who frequent this site will remember a declaration that we made on March 19, 2009 in a post entitled The Fed Follows Suit ,forecasting the eventual loss of the United States Government's AAA credit rating. At the time, we were lambasted as a bit "out in left field" for making such a preposterous prognostication. Now however, the idea is starting to gain traction, and has even managed to "earn" a bit of discussion time on the popular stock market "investment" shows. As usual though, the producers of these programs either lack the will or the ability to deliver any content other than the latest pre-packaged storyline from Wall Street.

This story in general began gaining traction yesterday, when the US's feeble associate, the United Kingdom, was warned by Standard & Poor's about the country's ever growing public debt as a percentage of GDP, and put on alert that a AAA rating is a privilege earned, not a right given at birth(or in Britain's case, through conquest). Instead of diverting attention away from Uncle Sam, this announcement served to increase investor scrutiny concerning, to put it simply, just what kind of ship is the US running?

The future of the US's AAA credit rating is quite uncertain, however, we would be willing to speculate, in general terms, just how we see this all "going down". The situation in the coming months, we think, will be quite analogous to that of General Electric-another American entity that had likely come to take its AAA rating for granted. As most of you remember, GE was stripped of its AAA rating by all three agencies quite recently. The official downgrade announcement however, came absent any sort of fanfare, panic, or surprise. The reason: The Market told us all about the looming downgrade long before the ratings agencies did. Similarly, as evidenced by the steadily increasing yield on the 10 year Treasury note, The Market is clearly beginning to question the vaunted AAA rating of the United States of America. The signalling process is in its very early stages however, and a change of course by Washington could still prevent the embarassment of a downgrade. Unfortunately, the sort of ideology/principles that would be necessary to effectuate this change of course are notably absent in both of the major political parties that operate in Washington.  

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