Financial Blogs Offer Truth and Dares

MBA (6/11/2008 ) Murray, Michael
Commercial real estate and capital markets players could find valuable insight from financial blogs—web sites with commentary, analysis, postings or all three—depending on the content, the site's reputation and its rationale.
Some top economic and real estate finance blogs include: The Big Picture , by Barry Ritholtz, president of Ritholtz Capital Partners, a New York City-based hedge fund; Calculated Risk, by a retired business executive and a former bank officer and mortgage lending specialist; and Mish's Global Economic Trend Analysis, by Michael Shedlock, investment advisor at Sitka Pacific Capital Management, Edmonds, Wash.

With help from Calculated Risk, Shedlock’s fortunes changed three years ago after starting his blog, which later added hits and then advertisers. Ritholtz and Shedlock contribute to Seeking Alpha, a web site that includes stock market opinion and analysis from blogs, money managers and investment newsletters and a provider of its own financial content.

Shedlock said his blog backs up arguments through facts, analysis and common sense, including his call that commercial real estate had hit its peak at about the same time when Sam Zell left the industry and that commercial real estate would "blow up" as it lagged residential.

“When it comes to Sitka Pacific, we actually invest based on what the market is doing, not what we think is going to happen,” Shedlock said.

For his blog, Shedlock speaks with industry insiders, some close to top executives. He said that while the mainstream media reports well on data and facts, they lack in analysis.

“The mainstream media is actually good about coming up with some numbers. They’re very lousy at analyzing what some of those numbers mean,” Shedlock said.

Many commercial real estate analysts have said that negative and inaccurate newspaper headlines create pricing instability in the commercial mortgage backed securities (CMBS) market because it causes investor panic and pricing instability from microhedge funds shorting CMBS through CMBX indices—synthetic CMBS derivatives.

However, Richard Green, professor at George Washington University, who will teach at the University of Southern California Lusk Center for Real Estate this fall, said media effect on residential and commercial real estate have been minimal.

“People have been saying that the housing market was the media’s fault. They didn’t say that on the run-up,” Green said. “The thing about housing that has people so negative right now is defaults all over the place, and that’s a fact. That’s not something that the media concocted. And those defaults arose from bad underwriting. I’m not particularly sympathetic to the view that the media has a whole lot to do with these dynamics—in either direction.”

Green, who started his blog as he was writing a book, said readers should not take anything as truth but that blogs make the industry more transparent and create a forum for discussion.

Shedlock continues to have concerns of a commercial real estate bubble and for other aspects of residential financing—forecasting that it will take years before residential and commercial real estate markets return to any sense of normalcy as the economy weakens.

“Right now, [banks] have taken $300 billion in writedowns,” Shedlock said. “At 10 to 1 leverage, that’s $3 trillion of future lending that can’t be made. That’s what we’re facing. What happens when we hit $1 trillion? That’s $10 trillion.”

Jim Butler, chairman of the global hospital group at the Los Angeles law firm of Jeffer Mangels Butler & Marmaro LLP, and author of Hotel Law Blog at www.hotellawblog.com, said the biggest advantage and risk to blogging is in deciphering information from rumors.

“Some [bloggers] are better, more accurate describers or observers than others and some more careful,” Butler said. “The blog can bring instant information but [the user] will learn by reputation that certain sources are more careful, more reliable and others may bring something to [the user’s] attention but [it] better be tested. It’s the difference between the Wall Street Journal and some rag being handed out door-to-door by unknown people.”

Some blogs have discussions; other bloggers only post articles; most bloggers have an ideological axe to grind and are transparent about it, Green noted. His concern, however, is in limiting people’s viewpoints, particularly following Rupert Murdoch’s acquisition of the Wall Street Journal.

“It’s like a newspaper. Until you read a newspaper for awhile, it’s hard to make a decision about whether it’s a good newspaper or not,” Green said. “Good blogs usually have links to sources that are the foundation for their arguments.”

Butler said analysts who can interpret a table of data for investments, mortgages, hedge rates or other vehicles and provide “some kind of insight is the real value-add” of blogs.

“The problem is that anybody can get the microphone and people could do damage if they’re irresponsible or wrong or [create] panic,” Butler said. “Right now, it’s very popular in selling newspapers and getting people to read blogs to forecast gloom and doom. I think we tend to overreact to these things and sometimes people prey on that.”

“To me, it’s just easy to put all these pieces together,” Shedlock said. “The amazing thing to me is that it has all hung together a lot longer—and stayed together a lot longer than what I thought.”