market folly

Just this morning we posted up a quick piece about John Paulson's latest investment into CB Richard Ellis Group. We touched on how Paulson was getting constructive on real estate as he has now bought into both CBG and started his own real estate recovery fund. But, our piece on Paulson & Co got us thinking about something else. His investment is all fine and dandy, but we want to turn the focus to a certain phenomenon in financial markets.

Today we want to address the continuing theme of a prominent investor's 'stamp of approval.' What do we mean by that? Think of it as enhancing your company's image as it pertains to financial markets; the market's perception of you. Because, as we've begun to see, there is quite an effect a firm's 'approval' can have on a stock. After all, the news of Paulson's investment caused a stir amongst the investing world. Additionally, shares of CBG were up 15% yesterday. Sure, one can easily argue that the stock was up due to CBG issuing guidance, rather than the news of Paulson's stake. However, we still think this phenomenon exists and want to look at it a bit closer.

Right now, commercial real estate has a problem. (Well, they've got a lot of problems if you boil it down... but, for sake of our piece, they've got 1 major problem). Right now, the general investing public doesn't want to invest in their sector. Everyone is citing horrible fundamentals for the industry as a main reason to avoid it like the plague. Commercial real estate is the next 'toxic' sector, if you will. Things are so bad there that CommRE companies have had to dilute shareholders with massive equity offerings in order to handle their current debt load. Even after massive short covering and a rally in the sector, they still most definitely have an image problem. Investors are still wary. So, how do you fix that image problem? You bring in one of the most respected investors in this current market and have them give you a 'stamp of approval.' And, that is exactly what Paulson has done for CBG. Their stamp of approval has caused everyone at the very least to pause and say 'hmm.'

"Hmm, maybe commercial real estate isn't all that bad if Paulson is investing in it."

And, that's exactly what the CRE sector needs (or any troubled industry for that matter). The interesting thing here is that this is nothing new; this phenomenon has been going on for a while now. Back in late 2008 when the financials were 'toxic' and everything was imploding, no one wanted to touch them. They had an image problem in the markets and no one wanted to just dive right in. So, what did they do? Goldman Sachs (GS) got Warren Buffett to invest and give them the golden 'stamp of approval.' Sure, Buffett got ridiculously good terms on his deal, so he of course had additional incentive. Heck, he even got better terms than the government could. And that right there is what we want to focus on. Companies are willing to bend over backwards to gain approval of that well-respected investor. It only takes one stamp, and poof, their image is revamped and a tiny sense of confidence is restored. That's the power a prominent investor can have on a company's market image. They can turn heads, begin to sway market sentiment, and start to change the negative perception.

Now, don't get us wrong. It's not all 'easy peasy' and these investors/hedge funds aren't just doing these deals for sh*ts. They're obviously doing the due diligence and putting in a lot of time and effort into the deal. At the same time, there is often incentive on their end to do these deals. Companies are providing opportunities to these investors in exchange for the prominent investor's golden stamp of approval. It's essentially a tradeoff and it seems to be working. The main goal here is to restore confidence and that's one easy way to go about doing it.

Buffett made out like a bandit with his deal and Goldman Sachs and the other financials recovered from the abyss (well, temporarily, at least). The company began to restore its image and it became 'safe' to invest in them again (at least for the time being). That's exactly what they needed and that's exactly what the market needed to reverse such bad perceptions. Troubled companies/sectors need to boost investor confidence. Here is an opportunity to do so.

With that in mind, we're left wondering one thing: why haven't more companies done this?