Market Notes and Links of Interest

The Dow closed below 13,000 points. When indexes are advancing, big numbers like 12,000 or 13,000 tend to create a sort of frothing-at-the-mouth confidence among investors. Is the opposite true when the direction is reversed?

Anytime would be a good time to buy into gold; today would be a great time.

Another sign of America's laziness?

The US Dollar: rock bottom is yet to come.

Intel has gone green.

Beware online trading sites. Even the biggies are susceptible to problems.

Google and Firefox: a marriage of technology.

Solar stocks run into a congressional problem.

It's Like Beating a Dead Horse

Pummeling the same company over and over gets boring and uninteresting after a while; but the news keeps on coming:

"A shareholder advisory group urged Beazer Homes's board Tuesday to fire Chief Executive Ian McCarthy because of financial, legal and accounting problems that the homebuilder has faced in recent months."

"Beazer has been beset by turmoil in the housing industry that has caused its number of home closings to plunge. Internal problems at the company have exacerbated the situation."

"On Monday, it said it expects to record pretax charges of $230 million in its fiscal fourth quarter."

"It also said it cut 650 jobs, or 25 percent of its work force, in October and is suspending its quarterly dividend to reduce costs."

"The homebuilder said it is unable to provide a full, audited report of its results for the quarter ended Sept. 30, but wanted to provide some preliminary data to investors."

"The company is currently in the midst of restating financial results for several prior-year periods."

"In the midst of restating financial results for several prior-year periods" is not a good sign. Here's a recap of the Beazer problems. Nothing else needs to be said.

The Beazer Blunders Continue

Despite the recent sparseness of posting, any Beazer Homes story deserves attention. This time, recent Beazer troubles has forced the suspension of dividends:

"Beazer Homes USA Inc...has suspended its quarterly dividend in an effort to firm up its capital position."

This follows the news that Beazer was receiving default notices, which followed the rumor that Beazer was contemplating bankruptcy, which followed the news that Beazer was firing the Chief Accounting Officer for attempting to destroy documents, which followed the news that Beazer was involved in an FBI probe.

You got all that??

To make matters worse, there's a recent report from Beazer's CFO in which he said that negative publicity was increasing cancellations:

"Beazer Homes USA Inc. Chief Financial Officer Allan Merrill on Tuesday estimated half of the company's cancellations in the latest quarter were driven by turmoil in the mortgage markets, while the other half were the result of rumors the company was facing bankruptcy."

Are you sure Allan? It couldn't be because of items like this:

"I'm a new Beazer homeowner and it has been quite an unpleasant experience. The current housing market is doing quite a number on the value of my home. However, Beazer is doing quite another. Beazer is not only assisting in the falling value of my home, but Beazer is having a fire sale within my housing development in order to raise cash. Beazer is a total disgrace to the American public who brought their product. As a customer I feel disrespected and ignored. I would never puchase another Beazer home."

Could it???

Los Angeles' Office Market: Four Months Later

Towards the end of June, this blog picked up on a story regarding the future of the LA office market. The story, citing a UCLA study, indicated that demand was to outpace supply all the way through 2010. The trend is culminating quicker than anticipated:

"Today the numbers that commercial developers watch are encouraging them. Downtown vacancy rates are dropping and rents are heading upward, new statistics show. Landlords say they are bullish unless a swift downturn in the economy is ahead."

"As the office market tightens across much of Los Angeles County, according to recent statistics, some of the biggest downtown landlords are raising rents -- something almost unheard of three years ago."

"Rents downtown will go up 4% to 5% by the end of the year, predicted Bill Flaherty, a senior vice president at Maguire Properties, which owns the most downtown office space."

Ding Ding Ding...Is Maguire a buy? In June, the feeling was to hold off. Since then, Maguire Properties stock price has fallen 22.5 percent. A company that was trading at $34.82 on June 19th, closed trading today at $26.97.

The fence: it's still being used...Maguire: neither buy, nor sell. Check for updates.

Links Worth Mentioning...

The Dow Remembers. To celebrate the twenty year anniversary of the Black Monday crash, the Dow shed 366 points.

Are there big things happening at Maguire Properties?

Housing starts: things will get worse.

Halo 3 is the video game barometer. Sales blow away forecasts.

Will natural resources become the biggest boom ever?

Citing too much speculation, Barron's Online offers the possibility of an oil crash.

Torre to Steinbrenner: NO! Good for Joe!

In California, Napa Valley doesn't hold a candle to Humboldt.

More from California: Schwarzenegger intends to privatize the state lottery.

Links Worth Mentioning...

Henry Paulson finally admits two things about the housing market:
(1) It poses a threat to the greater economy, and (2) It's not done unfolding.

Paulson also declares that there will be no bailout for the lenders or property speculators.

Freezing ARM rates wouldn't be a bandaid; it'd be a series of stitches that could stop the bleeding...at least for a while. Obviously, it's not good for business. Should that matter?

In a story related to real estate, homebuilder confidence is at a NEW all time low.

Speaking of homebuilders, orders for new homes plunged 39 percent for DR Horton.

Are US consumers completely tapped out?? That would be disastrous given our current situation. I heard somewhere that consumerism accounts for two-thirds of the US economy. Scary.

Dow 22,000...the result of a devalued dollar??

Q and A for a weak dollar.

Crude tops records. Is retail gas soon to follow?

Market Rally: Deniabull

Bloomberg is reporting that homebuilders could be a buy now:

"Lennar Corp. and D.R. Horton Inc., the two biggest U.S. homebuilders, advanced after Citigroup Inc. said the industry's 50 percent decline this year has made the stocks attractive. Citigroup led financial shares higher after the largest U.S. bank said it expects 'a normal earnings environment' in the fourth quarter and former Federal Reserve Chairman Alan Greenspan said the credit slump may be ending."

Homebuilders are not buys right now. Not with this.

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In the same day that Citigroup announces possible drops in future profits, the stock market surges with hopes that the credit crisis is over. Compare that with this:

"...the banks need to step into the confessional box and tell us just how much of the $2 Trillion drop in the value of US housing (so far) they are on the hook for. So far we’ve had a Billion here, a Billion there but the big boys have so far had their heads firmly in the sand and that means it’s time for a kick in the ass."

Ostriches, bulls...two names for the same animal? Currently, it seems that way.

Mad Money or Famous Flop?

Jim Cramer, the Nostradamus of nothing, is predicting that the DOW will top 14,500 before the end of the year.

Mad money or famous flop...three short months will be the judge.

KB Homes: The Future Looks Bleak

KB Homes reported third quarter numbers today, clocking in with a net loss of $35.6 million dollars. And then there was this from KB's CEO:

"We expect housing industry conditions to continue to worsen through the end of the year and into 2008"

In gloomier news, Seeking Alpha has a report based on the S&P/Case-Shiller indices indicating that homes prices should continue falling until at least 2011.

Out...Just in Time

Regarding Bear Stearns, talk about jumping out.......Just in time.

Halo 3: Beating Goals, Breaking Records

On it's first day available, Halo 3 racked up $170 million in sales:

"Microsoft Corp's "Halo 3" video game set an opening-day U.S. sales record of $170 million, outdoing any video game or movie debut and giving the company's money-losing entertainment unit a strong boost toward profitability."

This easily beat the goal, which was set at $150 million. Will there be a "Halo bump" tomorrow?

Homebuilder News: Bad and Worse

According to an article over at Seeking Alpha, Standard Pacific Corp is "America's worst homebuilder":

"SPF is going to lend its own shares to whomever buys the notes, so that the buyer can sell the stock short. I don't think SPF is long for this world."

This blog has called Standard Pacific Corp bad news for over three months:

"Standard Pacific is the percentage leader in terms of revenue coming from subprime customers. Furthermore, they only receive 51 percent of their revenue from prime borrowers."

"I recommend selling Standard Pacific because they're positioned to file bankruptcy before the housing bust runs its course. In addition to their subprime loan exposure, they're already losing money in a market that people are just now starting to call a "bloodbath". What will their bottom line show 18 months down the road??"

Recovery looks bleak for SPF.

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Lennar announced their third quarter numbers, and they were worse than expected:

"In a further sign of trouble for the battered housing and homebuilding markets, Lennar posted a much bigger-than-expected loss Tuesday for its fiscal third quarter, saying it has already slashed staff and plans further cuts."

"The nation's No. 1 homebuilder in terms of revenue, Lennar posted a net loss of $513.9 million, or $3.25 per diluted share, down from the net earnings of $206.7 million, or $1.30 per diluted share, in the year-earlier period."

Last quarter, Lennar announced a net loss of $244.2 million. The gap is widening. What happened? From Forbes:

"Lennar was dragged to the wider-than-expected loss after slashing prices on its homes and writing down the value of its land holdings. The company announced a loss on land sales of $344.7 million during the third quarter."

It's not that this information wasn't easy to predict:

"Lennar holds 9.1 billion dollars worth of inventory. Their respective inventories will continue to decrease in value as the housing bust runs its course and prices subside. Inventory makes up...77 percent of total assets for Lennar...As inventories decrease in value, so should the stock price"

Up next is KB Homes, who will report their third quarter numbers on Thursday. Last quarter, KB reported a loss of $174.2 million. What will their loss this quarter look like? $350 million?

Default Rates Stabilizing...For Now.

Everybody can take a deep breath. According to an American housing official, "The default rate on U.S. mortgages is stabilizing". That may be a true statement today; will it be in four months? One picture can speak a million words:


The next few months will see an incredible amount of adjustable rate mortgages reset their monthly payments. There should be a four or five month lag time, but expect default rates to correlate closely to the reset schedule above. There will be no long-term stabilization in the near future.

The Halo Bump?

Twelve hours from now, at midnight on Tuesday morning, Microsoft is releasing Halo 3. The much-hyped third part of a trilogy, Halo 3 is forecast to produce over $150 million in sales in a 24 hour period.

Much like the release of the iPhone, people have been standing in line since the weekend for the chance to be one of the first to have a copy. Will this hype create upward pressure on Microsoft's stock price? Will the release of H3 have an impact on the number Xbox 360 sales? Current sales of the new Xbox lag far behind Nintendo's Wii:

"According to NPD Group, 277,000 Xboxs were sold in August compared to 170,000 in July. Sony's Playstation 3 (SNE) moved 131,000 units while Nintendo creamed the competition with 404,000 consoles last month."

The beauty of Halo 3 is that it's only released for the Xbox 360, the expectation being that the release will have a direct impact on console sales. With the release of the new game, more people who've held off from buying the Xbox 360, will come around. And it doesn't hurt that Microsoft dropped the price by 50 bucks. Over the next few months, Microsoft's stock should rise. That's why it's being recommended at this point. Microsoft closed trading today at $29.08.

Housing Market: More Bad News

How much worse will it get? Over the weekend, CNN Money ran an article about the future of home prices in the United States. It doesn't look good:

"Over the next few years, more than three-quarters of the nation's housing markets will suffer some decline in home prices. Many will experience double-digit hits in a forecast that has worsened considerably in recent months."

"According to an analysis conducted by Moody's Economy.com, declines will exceed 10 percent in 86 of the 379 largest housing markets. And 290 of the cities will experience price drops of 1 percent or more."

As home prices went up, Americans felt richer; when the opposite occurs, expect Americans to start feeling poor. Falling home prices affect consumerism in the US. The most important implication of a housing price drop is the possibility that it could trigger a decline in consumer spending. Considering the fact that consumer spending accounts for close to 70 percent of the economy, a decline would be a very damaging to an already fragile economy.

At this point in time, the situation is unavoidable. In many markets, home prices have climbed to levels that make affordability impossible for the majority of the population. The laws of supply and demand dictate that as prices decline, the demand (ie: quantity sold) increases. For the housing market to complete its recovery, home prices will need to correct.

One last thing to note is that declining home prices will contribute to the already declining book value of homebuilders; look for homebuilder stock prices to decline further.

The Goldman Sachs Lesson (as told by a professional)

As a follow up to this previous post, Mark Hulbert offers a great lesson regarding the Goldman Sachs' situation over the last couple of months:

"The time to buy, Nathan Rothschild famously said, is when the blood is running in the streets."

"But how to put this apocryphal advice to actual use? What does it look like in practice?"

"For an answer you need look no further than what Goldman Sachs Group Inc. did in mid August, when it looked like the capital markets might dry up completely and the stock market appeared to many to be on the verge of a meltdown."

"The blood most definitely was running in the streets."

"So what did Goldman do? It invested $2 billion (that's billion with a "b") of its own money in one of its hedge funds that was hemorrhaging."

"The payoff? Its $2 billion investment has grown by a cool $320 million in the short time that has elapsed since then a 16% return in just one month, in other words."

Lesson learned. When the blood is flowing through the streets, make purchases or cover shorts.

More Rate Cuts to Come?

Bloomberg is reporting that the FED is certain to cut rates again before the end of the year:

"Government bond traders, who predicted six of the last seven recessions, say the Federal Reserve will lower interest rates again before the end of the year as the economy comes to a standstill."

Just to be clear, the FED is crazy to lower interest rates at a time when the United States' government depends so much on borrowing money from other countries. But the real question should be "How can a savvy investor use this information to make money?" Aside from gold and the gold funds that have previously been recommended, one way to take advantage of the prospect of lower interest rates is through American Century Tarket Maturity 2025 (BTTRX). Tim Middleton offers an explanation:

"The fund owns nothing but zero-coupon Treasury bonds maturing in 19 years, and therefore is a pure play on the direction of interest rates. If they are headed lower, as they would in a recession, this fund would soar."

The most savvy of savvy investors would have purchased shares towards the end of June; but that doesn't mean that tomorrow isn't a good time. The fund peaked at the beginning of September and has since dropped about five percent and appears to be gearing up for another shot up. And of course there's a very real possibility of a recession and more rate cuts, which make this fund worthy of consideration.

A Little Too Late...

I've been a bit predisposed the last couple of weeks, and in doing so, I've seen some profits dry up a little bit. At this point, I'm advising people to cover their shorts for Bear Stearns, Goldman Sachs, Citigroup, and JP Morgan. Closing prices for the respective corporations are as follows: BSC 117.32, GS 209.98, C 47.51, and JPM 47.13. I could have seen returns of 24 percent, 24 percent, 12 percent and 10 percent had I covered the shorts one month ago; but really, who expected the economic downturn to end in August? As it is, I'll still recognize some modest profits.

I still don't think we're at the bottom, but the recent rate cut from the FED has sparked a resurgence. I don't think it will last; Bernanke's just putting off the inevitable. But for now, cover your shorts...and be more observant than myself!

President Bush and Economic Optimism

The United States should be relieved; President Bush is optimistic about the future of the economy:

"President George W. Bush sought to assure the public that the U.S. economy remains fundamentally sound even as the country is experiencing 'unsettling times in the housing market.'"

"'Inflation is down, job markets are steady and strong,' Bush said today at a White House news conference. 'The fundamentals of our nation's economy are strong.'"

Is the President's steadfast optimism in Iraq the same kind of steadfast optimism he has in the economy? It would be nice to know where this optimism comes from. Maybe it comes from all those economics classes Bush took in college:

"'You need to talk to economists,' he answered when asked if there was a risk of recession in the US economy. 'I think I got a B in Econ 101. I got an A however in keeping taxes low, and being fiscally responsible with the people's money.'"

How is the President being fiscally responsible? Is he being fiscally responsible when our national debt has exceeded nine trillion dollars? Is he being fiscally responsible when he permits no bid contracts? And about that "B":

"President Bush as an undergraduate at Yale did not in fact receive a grade of B in his economics course. Bush received a grade that would correspond with a C-."

Oh....That's what I thought...

Deja Vu?

The situation at Countrywide Financial has been described as a "bloodbath" recently:

"Countrywide, the nation’s largest and recently most-embattled mortgage lender, announced it was laying off as many as 12,000 people today, roughly one-fifth of its 61,000-strong workforce. In a letter to employees company founder and ceo Angelo Mozilo called the current slump 'the most severe in the contemporary history of our industry.' He said home price appreciation had 'stopped dead in its tracks,' that there had been increased delinquencies in 'far too many borrowers' and that the secondary market for jumbo loans and those that don’t qualify for government-sponsored insurance 'has become nearly illiquid.'"

Bloodbath...Where have I heard that before? Hmmmmm...

Beazer Homes is in an Elevator (and it's only going down)

More bad news from Beazer Homes. First comes an FBI investigation regarding fraud within the company, which is followed by their Chief Accounting Officer quiting, which is then followed by rumors about bankruptcy; now, there are reports of Beazer Homes receiving default notices:

"Home builder Beazer Homes USA Inc said on Friday it received default notices related to senior notes from U.S. Bank, the trustee for the notes, sending its shares down as much as 13 percent."

"Beazer, which faces a deteriorating U.S. housing market as well as two separate probes related to its mortgage-origination business, said it believes the default notices are 'invalid and without merit.'"

Right. The notices are "invalid and without merit". It might seem like that if one is too ignorant to connect the dots. Beazer should be the first publicly traded homebuilder filing for bankruptcy.

The stock has lost two-thirds of it's value since I recommended selling it more than two months ago.

An Interesting Take...

From Brett Arends of The Street.com comes this rosy outlook of the housing market, homebuilders in particular: Homebuilders Finally Nearing the Bottom:

"Maybe I'm looking too hard for contrarian signs that the end of the slump is near. This could be a pause before another slide."

"But at times like these it is hard to keep in mind the obvious point that the shares on Wall Street are, obviously, a lot closer to the bottom than they are to the top."

What an astute observation! "The shares on Wall Street are...a lot closer to the bottom than they are to the top." Considering that there's a limit at the bottom (stocks can't be priced at $-1.00) and no limit at the top, it makes no sense to invest money based on literal numbers; rather, investments should be based on percentages.

The importance of this becomes obvious after examining one of the homebuilder stocks. DR Horton (DHI) peaked in July of 2005 at $42.82. Since then, the stock has lost 65.4 percent of its value, closing trading on September 5th, 2007 at $14.81. DR Horton is $28.01 away from the peak in 2005 and only $14.81 away from the ultimate bottom; it's true that "homebuilders [are] finally nearing the bottom". But suppose that someone invested in DR Horton at $14.81, only to see the stock fall to $7.00? Sure, it may have only been a loss $7.81 per share, but the percentage loss of 53 percent would rival the percentage loss seen from the summer of 2005 to this past week.

The example of DR Horton is representative of all of the publicly traded homebuilders. When comparing the charts seen here, courtesy of investertech.com, it becomes apparent that the homebuilder stock charts mirror each other in terms of percentage gains and losses.

Upon revisiting this topic next year, it will be interesting to see if Mr. Arends premonition becomes true, and perhaps it will, but a savvy investor would definitely stay away from homebuilder stocks in the upcoming months.

What's Wrong With This Picture?

On the one hand, we have this glowing report regarding the work ethic of the people of the United States:

"American workers stay longer in the office, at the factory or on the farm than their counterparts in Europe and most other rich nations, and they produce more per person over the year."

"They also get more done per hour than everyone but the Norwegians, according to a U.N. report released Monday, which said the United States 'leads the world in labor productivity.'"

And on the other hand, we have this:

"The economic expansion that began six years ago has failed to benefit most workers, according to a report from the nonpartisan Economic Policy Institute, released Monday."

"Productivity growth, although slower of late, has been strong since 2000. After a sluggish start in the period, employment has picked up, although at a slower pace than in past recoveries. Yet, that growth hasn't transferred to workers' paychecks, particularly for workers at the lower and middle end of the pay scale, the report found."

Wouldn't it be great if EVERYONE were rewarded for the prosperity of OUR nation!

And They Said it Wouldn't Spread...

Five articles of subprime spread.

The first: Subprime May Be Hitting Credit Cards, Too:

"Fallout from the mortgage mess and lower home prices may have started to creep into the credit card arena, judging from July payments and some initial moves by issuers to tighten the screws on cardholders."

The second: Mortgage Woes to Hurt Auto Sales:

"The ongoing slump in new-home sales and turmoil in the subprime mortgage industry will continue to hurt U.S. sales of light vehicles for the rest of the year and into 2008, according to an automotive market forecasting firm."

The third: Asian currencies led by rupiah dip as subprime losses spread:

"Asian currencies dropped yesterday on speculation global funds are exiting emerging-market assets as losses linked to US subprime mortgages spread."

The fourth: Layoffs Grow in Mortgage Industry:

"Brian Jurvis of Hazel Park wasn't surprised when he was laid off late last week from Countrywide Financial Corp.'s subprime lending division."

"Jurvis joined more than 25,000 workers nationwide who have lost jobs in the financial services industry since the beginning of the month -- more than half of them eliminated since Friday."

The fifth: Subprime pain spreads into office market:

"As business volume plunges for real estate firms hurt by the housing slump, they and companies that service them are abandoning office space and leaving landlords and surrounding communities suffering".

So far subprime problems have affected five other sectors or markets: consumer credit, auto industry, Asian markets, labor market, and commercial real estate.

Where else will this colossal problem rear its ugly head? Time will tell, but one thing is certain: the bubble is yet to burst. From Finance Markets.co.uk:

"In a recent CNN interview, Nouriel Roubini pointed out that current Federal Reserve estimates of the problem may be extraordinarily undervalued at $100 billion."

"Instead, he points out that minority equity is bundled with debt, which is then leveraged against further higher debts, which can in themselves then be set up as collateral against even yet higher debts."

"Any loss of value on the original equity value - ie, sub prime mortgages - leaves only debt sustaining debt - a house of cards that we are only beginning to see unravel."

Holy Deadly Debt, Batman! Does that mean we're in trouble??

Graduate School is a Bitch

I've been super busy with school the last ten days. I guess that's what I get for taking a mini-vacation. One more week and I'm done for the summer. Don't expect any new posts until then. I'd like to take this opportunity to drop the Brazilian ETF I trumpeted a few weeks ago, EWZ. The fund has lost 17 percent since my recommendation. Enough is enough. It's my belief that the problems we're seeing in the US economy has been spreading to the world economy; perhaps no country is safe. EWZ closed trading today at $56.62. I recommended it at $68.22.

I'll see you in a week or ten days. Be weary of the market!

Out of Internet Range

I've been out of internet range since yesterday. I have but one fleeting moment here, since I'm back in town for an hour. The market has been acting as irrational as ever. Up 100 points, down 200, it's been hectic. I will be back in range on Sunday to write all about the craziness and to recap July.

Enjoy the Weekend!

The Beazer Homes Rumor

There were some rumors flying around today about the possibility that Beazer Homes was about to file bankruptcy, citing claims that they've run out of cash and credit. Of course the company denied theses claims, but I think the rumors might hold more water than the homebuilder would like you to believe. If you'll recall, the company fired their Chief Accounting Officer last month for attempting to destroy records. If you've got an employee attempting to destroy records, you have got a serious problem. That why I recommended selling or short selling Beazer Homes last June 25th. But some investors took that news and interpreted it as a buy. You don't believe me? If you look at this chart of the stock's price over the last three months, you can see that there are are upticks on June 27th, July 6th and July 13th. It should be noted that the last date listed was Friday the 13th. I guess that's the way those investors who bought will interpret it as. Since then, Beazer has fallen hard. And why shouldn't they? There has been some serious turmoil in the company, possible attempts to defraud investors. It brings me back to the question: why was their Chief Accounting Officer attempting to destroy records? I made over fifty percent on my short sell, did you?

And then there's the story over at CNBC: "Options Report: Speculators Burned Chasing Beazer Rumors"

As Beazer shares tumbled to a low of $8.10 from an early trading day high of $14.01, the out of the money August 10 puts rose 30-fold from early trades of 10-cents to an intraday high of over $3 as implied volatility surged briefly to the 300% level. Once the rumors were refuted, and the stock rebounded, the puts quickly lost more than half their value from the spike-high of the day.

Any savvy investor would have dumped Beazer as soon as news emerged that they were dumping their Chief Accountant. Any time a company dumps a high level executive of finance or accounting for impropriety, you know the company has trouble. I realize that there are some risks involved with selling a company short, but when the news is right, it eliminates that inherent risk of infinite loss. So for all those investors out there who were "burned" chasing rumors, you should have chased the facts when they emerged one month ago.

Bear Stearns Has More Problems

In a shocking(?) turn of events, a third hedge fund managed by Bear Stearns is in trouble. Yesterday, they halted investors from bailing out:

"Bear Stearns Cos., manager of two hedge funds that collapsed last month, halted redemptions from a third fund after a slump in credit markets prompted investors to demand their money back."

Today, more Bear Stearns' hedge funds filed for bankruptcy:

"Two Bear Stearns Cos. hedge funds heavily exposed to the flagging mortgage industry filed for bankruptcy protection late Tuesday, two weeks after the company told investors one was essentially worthless and the other had lost more than 90 percent of its value."

"The funds were squeezed after Bear Stearns made wrong-way bets on the home mortgage market and was caught as loans to risky investors began to default."

"Bear Stearns is the nation's fifth-largest investment bank and specializes in mortgage-backed securities."

Is it only a matter of time before the company goes belly up? The more news that comes out, the more it looks that way. Meanwhile, investors have deemed other investment bank assets "junk":

"On Wall Street, Bear Stearns Cos., Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Goldman Sachs Group Inc., are as good as junk."

"The highest level of defaults in 10 years on subprime mortgages and a $33 billion pileup of unsold bonds and loans for funding acquisitions are driving investors away from debt of the New York-based securities firms. Concerns about credit quality may get worse because banks promised to provide $300 billion in debt for leveraged buyouts announced this year."

I wonder what James Altucher thinks about all this? I bet he'll say that Goldman Sachs is a screaming buy.

The Golden Rule? Gold Will Rule

More metal talk today. There's been more buzzing about the mining companies shedding their gold hedges. From Briefing.com:

"However, the industry has clearly realized this and gold companies have been de-leveraging, and thus are once again drawing investor attention due to the potential for earnings acceleration as the price of gold rises."

"While prices are expected to rise more moderately this year compared to 2006, the bullish gold fundamentals will likely drive prices even higher in 2008."

This bodes well for those invested in mining companies. Just as rising oil prices benefit oil exploration companies, rising gold prices benefit mining companies. And why would the price of gold rise? Well, in addition to an increasing demand, the supply of gold is decreasing:

"On the supply side, production has been curtailed due to the absence of new discoveries as well as environmental activism in North America and Asia, and political and labor turmoil in hot spots such as Venezuela and Angola."

Ah what great news that is. At the beginning of the month I recommended a couple of mining companies. This month I recommended a few funds that are derived from various mining companies. I shed the mining funds last week due to volatility, but I'm retaining the two giants: Newmont Mining (NEM) and Barrick Mining (ABX). Not invested yet? There's still time; gold hasn't exploded yet.

The Bears are Breaking the Banks

Forbes.com has a great article on the bears ruling banking stocks. Tom Van Riper makes some very sound arguments for that reasoning:

"Investors in major U.S. brokerage stocks haven't seen the last of the sell-off. Not with bank funding for merger deals slowing as credit gets more expensive. Wider spreads in the junk bond market, where so many deals are done, mean the costs of issuing securities are higher, as are the risks for doing so."

I cannot disagree with logic. And for just these same reasons, I'm waiting to see what happens before taking my profits. When Goldman Sachs fell below $200, I was tempted to cash out. Of course, I did not. And when Goldman Sachs broke through the $200 dollar mark last week, I was regretful. I waited and saw GS lose even more value. For that reason, I'm holding off on covering my short. I think we've got a ways to go before banking stocks begin a recovery. Mortgage rate resets have yet to reach a peak, while overall business credit is trending tighter and tighter. The Chrysler deal is a great example. With every new story coming out of the financial main stream media, psychological factors will push banking stocks lower. And if Hank Paulson has his way, the federal deficit will crowd private investment even more, but that's for a different post.

Of course there are some people who will disagree with me. Here, James Altucher of The Street wonders why Goldman Sachs is so cheap. He even goes so far as to say that the company might be subject to a private buyout. Here, Mr. Altucher continues his faulty reasoning by indicating that investors should buy Goldman Sachs, as well as JP Morgan, and Citigroup, all of which I've indicated at sell or short sell status. At least James didn't try and convince investors to buy Bear Stearns. Ha!

I may be wrong about this next point, and if that's the case, then call me out. I think the credit cycle is at least as easy to predict as the housing market. Why is this? Because the credit (ie: banking) industry moves at a pace that is similar to the housing market. Complete cycles in both sectors take years to complete. As soon as one realizes that the credit cycle downturn is beginning, a savvy investor would take bank stock shares from Mr. Altucher's account and sell them short. When the credit cycle peaks as high as it has this last go around, the drop should act in symmetry. What does this mean? Big money for "danger-seeking" investors who know how to play the game.

Subprime's Other Victims??

Give me a break! I found this article from the NY Times:

"You’ve gotta feel for him. John Devaney, United Capital’s chief executive and a one-time master of the mortgage market who has been taking it on the chin lately, has put his yacht up for sale — for $23.5 million. According to TheStreet.com, he is selling his 142-foot Trinity yacht, dubbed Positive Carry, and his $16.5 million second-home, named Sardy House and the home of the nation’s largest living Christmas tree."

This is a great example of the fact that the entirety of the media only exhibits a persona recognized by the upper class. Does the NY Times really expect me to feel sorry for this 'poor' guy?

I could feel sorry for the guy, except for the fact that he has to sell his 23 million dollar yacht and his 16 million dollar second home. I wish I owned a first home! This is a pathetic piece of journalism, only representative of the most upper class of citizens. Yuk!

Edward Kennedy: Working for the Poor Man

This weekend there was talk of the Democratic Party attempting to raise the minimum wage above nine dollars per hour. I applaud that attempt. What's more important is this:

"There is also a possibility the wage would be indexed to inflation or some other measure of the cost of living. Ten states already have index adjusted-minimum wages. They provide for automatic increases to the wage in the same way Social Security or Congressional salaries factor in inflation and costs of living."

The wage NEEDS to be indexed to inflation. Currently, the Federal Reserve has more control over inflation than one might think. The obvious and glaring reason has to do with the fact that the FED doesn't include food or energy into their calculation of CPI, the index used to measure inflation. In addition to this point is the fact that the Federal Reserve has the ability to increase the money supply at a whim. If the money supply were to increase, this would cause inflation. Inflation causes prices to increase, but prices don't really increase; rather your dollars are just worth less.

We should note that different wages have different values among regions:

"Liana Fox of the labor-backed Economic Policy Institute said part of the reason for Kennedy's initiative is that by July of 2009, when the federal minimum is $7.25, 12 states with their own minimum wage law will be over $7.25."

"We've never had a situation like that before," said Fox. "It will increase pressure at the federal level."

Thank god for states' rights. And thank god for the rights of the city governments to go one step further. Take San Francisco for example. The minimum wage is already at $9.14 per hour. When you consider the cost of the town, you're still not in the livable wage arena, but at least the city government is making the effort. Again, from CNN:

"Raising the wage to $9 an hour 'would cause a lot of trouble,' said Edwards. 'There are huge differences in local economies. $9.50 an hour in New York and $9.50 an hour in Kansas are two different things."'

It's true that there needs to be an indexing to livable wages, instead of setting a national minimum wage. The nation consists of many different economies, which constitute many different minimum wages. We need to create a system that can peg the different wages to the regions in which they're located. This is definitely a problem, one that could be cured by instituting regional economic centers that monitor the price increases of their respective areas. Conservatives and Republicans will certainly rail against this idea as it would only expand the bureaucratic system currently in place. But it needs to happen.

NY Times: Homebuilders See Inventory Value Decline

On Friday, the NY Times posted a story explaining that the homebuilders have seen major declines due to a devaluation of inventories they hold:

"D.R. Horton, one of the nation’s largest home builders, posted a third-quarter loss after writing down the value of unused land and warned there was no recovery in sight for the troubled housing industry."

"Another home builder, Beazer Homes USA, which faces federal investigations of company practices and personnel, also said it swung to a loss in its fiscal third quarter after cutting prices to spur sales and taking charges to write down the value of unsold inventory."

My prediction has come to fruition. I reported this last month:

"Their respective inventories will continue to decrease in value as the housing bust runs its course and prices subside. Inventory makes up 73 percent of total assets for KB Homes, 77 percent of total assets for Lennar, and 83 percent of total assets for DR Horton. As inventories decrease in value, so should the stock prices."

This will continue to happen over plenty more quarters. The losses reported will get deeper and deeper and unlike my thoughts last month, some major homebuilders will file for bankruptcy. This has to do with the fact that homebuilders began forecasting future projections based on super-inflated numbers and made speculative bets based on those inflated numbers.

Of course there are those people who think it has nothing to do with fundamentals; rather, it has to do with psychology:

"'It's a psychological problem right now, more than anything else,' Hovnanian said on CNBC's 'Squawk Box.' 'Job growth is good. Interest rates are still really, really good. Demographics are good so it will come around.'"

"'We've been through these cycles many, many times before,' he continued. 'When it's bad everybody thinks it's going to be bad forever, and that’s not the case. It is going to come around.'"

I agree with Ara about the fact that it won't be bad forever, but I do think that there are some homebuilders that are extremely overextended. Ara insists that interest rates are low and job growth is good, but he fails to see two points:

(1) Job growth means nothing without wage growth. We can create millions of new jobs, but if they're all minimum wage jobs, then what's the point? It wouldn't bode well for the housing market unless they feel like making more subprime mortgage loans.

(2) Interest rates are at historical lows, but they're not low if you look at the last eight to ten years. The reason homebuilders and the housing market were able to persist after the recession at the turn of the century can be attributed to Alan Greenspan and his psycho-crazy idea of setting interest rates below the rate of inflation. He saved the economy temporarily, while putting off the major recession until later.

To recap, I think the recent housing downturn has more to do with fundamentals of the economy than it does with the psychology of the average prospective homebuyer. I think that the value of land will continue it's slide for years to come, creating lower book values for homebuilders who are overextended, which in turn creates downward pressure on homebuilder stocks. Don't miss out on this easy opportunity.

Leisure Time

I'm tired of talking financial and economic news all the time. I'm going to be posting leisure items in addition to weekend video (which doesn't always address leisure items). The first 'leisure time' is of the boxing nature. I just got done watching ESPN Friday Night Fights. The main bout pitted Andre Berto vs. Cosme Rivera. The fight was trending towards Berto until the sixth round, when Rivera scored a knockdown. Unfortunately for Rivera, the knockdown only awakened the beast in Berto. The subsequent rounds were devasting for Rivera, including one in which a nasty cut appeared under the right eye of Rivera.
Ultimately, Berto won the fight unanimously by a wide margin, but Rivera was only the third boxer out of 19 to go the distance with Berto. Andre Berto is now 19-0 with 16 knockouts. Rivera, although he lost, should feel proud. He was a part of one of the most entertaining fights of the year, and the only fee I had to pay was for cable. Splendid!

(I've got plenty more to say about the financial news of the day, but it will come later. For now, I'm enjoying leisure.)

Dow(n) Drops Another 200

Stocks took another deep hit today as the Dow dropped another 200 points. Amazingly, the bulls decided that a better than expected GDP growth report wasn't enough to quell the risky fundamentals. From Yahoo:

Wall Street extended its steep decline Friday, propelling the Dow Jones industrials down more than 500 points over two days after investors gave in to mounting concerns that borrowing costs would climb for both companies and homeowners. It was the Dow's worst week in nearly five years.

The credit squeeze is on. Investors are facing the hard fact that homeowners and businesses alike are seeing a tightening lending trend. For months, investors ignored the fact that the mortgage rate reset was going to get worse and worse this year. The reset chart has been available on the internet since the beginning of the year. It wasn't hard to find with Google. And there have been news reports warning of the looming problem. On July 10th, there was an article on CNN Money warning that October of 2007 was to be a record month.

Despite that the Dow surged up to 14,000. Psychology was trumping fundamentals. Now, the tide has turned.

Gold Funds That Make Sense

One of the purposes of this blog is to educate myself. I have been educated. I'd like to address the issue of gold funds right now. I recently suggested three gold funds that I thought were good buys: XAU, HUI, and GDX. Apparently, they are more sensitive to price changes than the previous ETFs I suggested: IAU and GLD. I made a mistake. To illustrate, let's look at the return (or loss) from both. Here's the first group:

I recommended XAU at a price of $158.26. Since then, we've seen a drop to $147.25. That equates to a loss of 6.95%.
I recommended HUI at a price of $368.93. Since then, we've seen a drop to $345.79. That equates to a loss of 6.27%.
I recommended GDX at a price of $42.99. Since then, we've seen a drop to $40.30. That
equates to a loss of 6.26%.

Now let's look at the losses incurred by the second batch over the same time period:

IAU's closing price on the same day of the recommendations was $67.43. It closed trading today at a price of $65.67. That equates to a loss of 2.61%
GLD's closing price on the same day of the recommendations was $67.47. It closed trading today at a price of $65.65. That equates to a loss of 2.70%

What I see here is that the first two funds I recommended seem to be much less susceptible to the volatility seen in the precious metal market. The first three funds lost much more equity than the last two. For this reason, I recommend that the funds I first suggested be the ones to focus on for your portfolio. I hate flip-flopping so soon after recommending them, but sometimes it only takes a few days to analyze the implications. XAU closed at $147.25. HUI closed at a price of $345.79. GDX closed at a price of $40.30. Reallocate your portfolio to reflect removing those funds and place the diminished proceeds into IAU and GLD; over the long term, gold will continue to rise. I will record the losses of the other three in shame. (And here I thought I was making progress...at least I have the homebuilders)

Mortgage Deliquencies: Destined to Rise

A headline I saw today: "Mortgage Rates Could Soar". Could is not the word I would use. From the story:

"The already poor performance of many mortgage loans will worsen substantially through the rest of the year, according to an analysis released Thursday by Moody's Economy.com."

"The worst-hit loan category will be subprime adjustable-rate mortgages (ARMs). Economy.com expects foreclosures for those loans to hit 10 percent of that group by mid-2008. The foreclosure rate for that group is currently 4 percent and was as low as 2.5 percent in 2005."

When you consider the looming mortgage rate reset that's just starting out, it's illogical to think mortgage rates could soar. Could implies that it's a possibility or even a probability. It's way passed that. Mortgage rates will soar, perhaps into the realm of federal bailout. There will be a lot of people who will need a lot of financial help in the coming months and years and there will be a lot of people who lose their home. The population's current financial IQ is poor at best and it's something I think that will be a huge hindrance to our future economic growth.

Homebuilders Tank; Dow(n) Jones

Two homebuilders reported earnings today. Unfortunately, they weren't earnings; they were losses. And they were much worse than people thought they'd be.

"For the three months ended June 30, the company posted a loss of $123 million, or $3.20 per share, compared to a year ago when it earned $102.6 million, or $2.37 per share." "The result was significantly worse than estimates on Wall Street, where analysts projected a loss of 32 cents per share, according to Thomson Financial."

Significantly? That's an understatement! The loss was 640 percent worse than analysts expected. It's frightening how far off the analysts expectations were. Millions of investors base their picks on what these analysts report.

What about DR Horton? From Yahoo:

"D.R. Horton Inc., posted a third-quarter loss Thursday as one of the nation's largest homebuilders wrote-down the value of unused land and warned there was no recovery in sight for the troubled housing industry."

"With the write-down charge, Horton said it lost $823.8 million, or $2.62 per share, in the quarter, compared with a gain of $292.8 million, or 93 cents per share, a year earlier."

"Analysts surveyed by Thomson Financial expected losses of 35 cents per share."

Analysts were 648 percent off with their DR Horton expectations. The evidence is here: people are vastly underestimating the severity of the housing downturn. The problem will still get worse before it gets better. The more days that pass, the more I think that the recovery won't happen in 2009. This could take many years to iron out.

The news helped to spark a 300 point drop in the Dow. Apple is the only stock I've seen rising. For now, the bears rule the world. Are you covered?

Hank Paulson: Don't Single Out an Industry!

Henry Paulson came out today to criticize congress' attempt to impose working tax rates on hedge fund investors. I agree with his view that we shouldn't single out an industry for imposing a tax rate:

"'I want to avoid responding to the headline of the moment, singling out an industry,' Paulson said. 'I don't believe it makes sense to put in a special provision aimed at one industry today.'"

What industry would that be? The hedge fund industry? And what industry do they engage in? Let me explain the problem I have. Hedge fund managers are managing other people's money. A guide for determining the tax rate:

(1) If you're managing your own money, then you should be taxed at fifteen percent.
(2) If you're managing somebody else's money, then you should be taxed at thirty-five percent because you're essentially acting as a money manager.

A Bad Omen: Subprime Defaults Drop the "Sub"

It's not just a subprime problem anymore. Countrywide has reported that mortgage defaults are now starting to affect quality borrowers:

"The subprime mortgage meltdown has begun to spread to prime loans as even credit-worthy borrowers have started to fall behind on payments."

"'Unable to afford their own homes, [borrowers] turned to increasingly risky mortgage products,' said Amy Klobuchar, a member of the House of Representatives from Minnesota, speaking Wednesday before a hearing of the Joint Economic Committee examining the national foreclosure crisis."

"Some home buyers, caught up in red-hot markets and afraid of getting locked out of homeownership forever, overpaid for houses."

Home prices rose so high in the early part of this decade, that most people couldn't afford a traditional 30 year mortgage. Well, I guess they couldn't really afford non-traditional mortgages either.

The inability to live within your means and to recognize the limits of your means is going to make a relatively small problem (subprime defaults), a very big problem. This is the kind of widespread problem that could wipe out the middle class in this country: going into a loan based on highly inflated property values that then begin to deflate. As mortgage rates reset, more and more families will find themselves upside down in terms of property values versus loan balance. That will not be easy for the economy to iron out.

But wait, there's more:

"Analysts said the trend could continue, particularly in areas of the country that have been hardest hit by job losses in general or seen a decline in speculation-driven construction, such as South Florida, parts of California and Las Vegas."

Job loss? Rising mortgage payments? Rising energy costs? Rising food costs? This doesn't sound very good, considering consumerism accounts for over two-thirds of our economy.

More Horrible Housing Numbers

The bad news in housing gets reported as if it's a surprise. Consider the headline: "Existing-home sales fall to 5-year low". Did anyone REALLY believe that sales wouldn't drop to that mark? Did someone think that housing would rebound? From the article:

"Sales of single-family homes plunged at a 30% annual rate in the second quarter, the steepest decline in 28 years, the National Association of Realtors said Wednesday. Sales of single-family homes were down 12% in June compared with a year earlier."

"Even with a significant 4.2% drop in the number of homes for sale, the supply remained at a 15-year high at 8.8 months' worth of sales."

Any of that information would have made much bigger headlines than the one Market Watch used. Sensational headlines, in fact. We saw the steepest decline in 28 years. DR Horton is reporting earnings tomorrow. Anyone wanna make any bets?

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Update 07/25/07 5:55 PM: It should also be noted that Beazer Homes is expected to announce earnings tomorrow as well. Analysts have pegged them to report a loss of 0.46 per share. Look for their stock to dive some more if they miss that expectation.

Serious Reading: 1920s Style

I've been reading some chapters from a book that gives a synopsis of the 1920s and I've found that the last chapters have offered some chilling parallels to our times. I'm not done reading, but I think the comparisons are scary. Market Oracle alerted me to the publication. You can find it here. I'm reading (per M.O.) the eleventh through the fourteenth chapters: "Home Sweet Florida" through "The Aftermath" are the ones to focus on. I'll review with full quotes and comparisons in a day or two.

Take Your Profit

I'm recommending selling oil and taking the profit. I realize this would have been a great move on Friday, but I'd rather lose a few percent from a price decline than lose ten or fifteen percent from selling too early. It seems that OPEC is willing to increase supply if needed:

"Iran said on Tuesday Opec would inject more crude oit to the market if it was needed, the official IRNA news agency quoted Javad Yarjani, head of Opec affairs at Iran's oil ministry as saying."

"'In case the oil market needs it, Opec will inject more oil into it,' Yarjani said."

OPEC knows a few things. First of all, the members know that increasing energy costs cause slower economic growth. Slower economic growth means OPEC would sell less oil, albeit at a higher price. But if economic growth were to grind to a halt, OPEC would sell virtually no oil. In addition to this, OPEC realizes that if they increase supply which creates downward pressure on prices, then the people will buy more. This could lead to greater profits than selling less oil at a higher price. Of course, this is all me hypothesizing about their intentions.

I recommend selling your crude and wait for a jump in point at the end of the year or the beginning of next year. As of this writing, crude futures are selling at 73.28.

iPhone Estimate: iWasRight

Earlier today, AT & T reported the number of iPhone activations for the first weekend. From Yahoo:

"The nation's largest provider of broadband Internet and land and wireless phone services said Tuesday that 146,000 subscribers activated new iPhones in the first 30 hours of sales as the quarter closed"

Sales estimates ranged as low as 100,000 units and up to 750,000 units. Here's what I said way back on June 25th:

"I think the iPhone will sell closer to 150,000 units over the first two days. The longer-term sales expectations should be easier to meet as prices go down and as people's wireless contracts end."

My estimate of first weekend iPhone sales was within three percent of the actual activation total. After taking all of the factors into account (phone price, only one service provider, high cost of service, etc.), it was hard for me to believe that sales in the first weekend would be much more than 150,000.

Of course predicting demand for a product doesn't necessarily make investors money. What makes investors money is predicting stock prices. I should have rode the wave of hype and enthusiasm until unit sales figures were published, instead of following my gut feeling that the stock is overvalued. Bulls will be ostriches until hard sales figures are known. Now that the numbers are in, the price should fall, creating a possible buy opportunity. We shall see

I stand by my long-term sales expectations for the iPhone.

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Update 07/25/07 5:25 PM: I realize that there were only 146,000 activations in the first two days. But I find it hard to believe that nearly half of the supposed 270,000 units were unable to or failed to be activated within the same time frame. Had I purchased an iPhone, the first place I would have gone is home to activate it. It serves no purpose if it's not activated. I guess the same confusion over company expectations for the device have carried over to reporting actual sales numbers.

Hundred Dollar Oil - Sooner or Later?

We should all be prepared for oil/gas getting more expensive in the future. What we might not be prepared for is the fact that it could happen much sooner than people expect:

"'We're only a headline of significance away from $100 oil,' said John Kilduff, an analyst in the New York office of futures broker Man Financial Inc. 'The unrelenting pressure of increased demand has left the market a coiled spring.' New disruptions of Nigerian or Iraqi supplies, or any military strike against Iran, might trigger the rise, Kilduff said in a July 20 interview."

A military strike against Iran is highly unlikely, though I'm not discounting the possible threat they pose. But oil will climb to a price of or above one hundred dollars by the summer of 2008. Oil has been a volatile commodity and will continue to be for as long as the BRIC (Brazil, Russia, India, China) countries are growing. I previously said that oil will exhibit an upward trend, while at the same time offering buying opportunities about once a year. I believe this is based on seasonality:

"On January 18, 2007, the price of crude was $50.20. Today, June 14th, oil traded at $67.69 per barrel; that's a 35 percent increase since the winter months. Seasonal cyclical patterns are apparent in the short term."

I find it hard to believe that we're at the seasonal peak right now. Although oil pulled back today, it should be temporary. The Market Oracle offers a great visual representation of oil's summer peak last year. Oil peaked at a price just above $78 in September; although last summer seemed to have more conflicts last year, I would estimate that the world demand for oil this summer is higher than last summer. I would suggest taking profits if oil tops $78 dollars (16.5% profit) this summer and wait to jump back in during the winter months, which generally offers more jump-in points. Of course, I wouldn't recommend anything until the event happens and I issue a recommendation; oddities in the world could trigger unusual spikes and a savvy investor would much rather take more profits, even if the risk increases.