Blazers win the NBA Draft Lottery:
Greg Oden Goes Number One:
Greg Oden Rally in Portland:
Saturday, June 30, 2007
Thursday, June 28, 2007
Home Builder Inventory, Cash Flows, and Stock Prices
The most important number on any home builder's balance sheet is inventory, especially when the market turns south. The inability to sell houses can cause a cash flow crisis for even the most stable company, which leads me to an article found yesterday at Marketwatch:
"'Based on our detailed analysis of inventory trends, we do not think investors should be overly optimistic regarding the home builders' ability to generate cash flow in the next 12 to 18 months,' analysts Nishu Sood, Lou Taylor and Rob Hansen wrote in a lengthy report this week."
The article discusses the job of the analyst to determine which homebuilders have the largest inventories. They go a step further than I did here, differentiating between "standing inventory" and "remaining land investment". The former includes unsold homes already built and land in the process of being built on, while the later includes all other vacant land:
"'In arguing that standing inventories are generally less risky from a future cash-flow perspective, we contend that the much shorter time horizon of standing inventories implies a much higher probability of near-term conversion to cash,' the analysts said."
"'As a result of its dramatic decline relative to overall inventories, standing inventory went from being 52% of balance sheet-inventory at the first quarter of 2006 to only 34% at the first quarter of 2007,' the analysts observed."
The drop in standing inventories wasn't the result of selling it off. It was the result of declining market values of the properties. In other words, actual inventory didn't decline but the value of that inventory did.
"For example, if a builder purchased a lot for $200,000 that's now valued at $150,000, generally accepted account principles require the balance sheet to reflect that decline. The result is lower book value, which is used to determine a stock's valuation."
This is exactly the point I made here:
"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."
The inflated price of real estate, particularly land for housing, has caused the price of homebuilder stocks to be equally inflated, which is precisely the reason I'm so bearish on them. Even now, the companies haven't accepted the fact that the downturn will be long and arduous:
"'Based on our detailed analysis of inventory trends, we do not think investors should be overly optimistic regarding the home builders' ability to generate cash flow in the next 12 to 18 months,' analysts Nishu Sood, Lou Taylor and Rob Hansen wrote in a lengthy report this week."
The article discusses the job of the analyst to determine which homebuilders have the largest inventories. They go a step further than I did here, differentiating between "standing inventory" and "remaining land investment". The former includes unsold homes already built and land in the process of being built on, while the later includes all other vacant land:
"'In arguing that standing inventories are generally less risky from a future cash-flow perspective, we contend that the much shorter time horizon of standing inventories implies a much higher probability of near-term conversion to cash,' the analysts said."
"'As a result of its dramatic decline relative to overall inventories, standing inventory went from being 52% of balance sheet-inventory at the first quarter of 2006 to only 34% at the first quarter of 2007,' the analysts observed."
The drop in standing inventories wasn't the result of selling it off. It was the result of declining market values of the properties. In other words, actual inventory didn't decline but the value of that inventory did.
"For example, if a builder purchased a lot for $200,000 that's now valued at $150,000, generally accepted account principles require the balance sheet to reflect that decline. The result is lower book value, which is used to determine a stock's valuation."
This is exactly the point I made here:
"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."
The inflated price of real estate, particularly land for housing, has caused the price of homebuilder stocks to be equally inflated, which is precisely the reason I'm so bearish on them. Even now, the companies haven't accepted the fact that the downturn will be long and arduous:
"They have to spend significant time and money just to get land entitled and approved for building. 'Housing generally has momentum -- if the market turns, builders have to follow through on starts; they can't abandon things midway,' said Sood, the Deutsche Bank analyst.
'Does the builder assume the worst and walk away or does the builder hold out hope for a recovery and continue to invest in the project? We suspect that the latter scenario has been the more common one recently,' the analysts said in their report."
The homebuilders didn't learn the lesson from the early nineties. They're at it again; their heads in the sand, their divisions overbuilding, flooding the market with even more supply. Instead of doing that, they should be more focused on aligning supply with demand. Until they do this, supply will out pace demand and cash flow from operations will remain in the red.
The homebuilders didn't learn the lesson from the early nineties. They're at it again; their heads in the sand, their divisions overbuilding, flooding the market with even more supply. Instead of doing that, they should be more focused on aligning supply with demand. Until they do this, supply will out pace demand and cash flow from operations will remain in the red.
KB's "Unexpected" Loss
For some, it was unexpected. For others, not so much. Earlier in the day, KB posted a quarterly loss of $174.2 million:
"The results 'reflect the current oversupply of new and resale housing inventory, a difficult situation compounded by aggressive competition and continued weak demand,' said KB Home Chief Executive Jeffrey Mezger in the earnings release."
KB Homes joins Lennar in posting their first loss since the housing market began to unwind. Lennar's losses were forty percent higher than KB's ($174.2 M versus $244.2 M), but were distributed over more shares. Lennar lost $1.55 per share versus $2.20 per share for KB Homes.
"The results 'reflect the current oversupply of new and resale housing inventory, a difficult situation compounded by aggressive competition and continued weak demand,' said KB Home Chief Executive Jeffrey Mezger in the earnings release."
KB Homes joins Lennar in posting their first loss since the housing market began to unwind. Lennar's losses were forty percent higher than KB's ($174.2 M versus $244.2 M), but were distributed over more shares. Lennar lost $1.55 per share versus $2.20 per share for KB Homes.
Wednesday, June 27, 2007
Appraisal Fraud
It's really sad that it's come to this:
"It's called 'hitting the number' - or inflating a home's value - and real estate appraisers who don't do it often enough can find it hard to make a living."
Yet another problem contributing to the housing boom/bust. So we combine appraisal fraud with relaxed lending standards and low interest rates and we get.........wait for it............
A Housing Bubble!
Gee! Who'd have thunk it:
In prepared testimony Tuesday before a Senate subcommittee on mortgage industry abuses, Alan Hummel, spokesman for the Appraisal Institute said 'Appraisers face pressure from various parties involved in mortgage transactions. They are told to doctor their appraisals or else never see work from those parties again.'"
It's absolutely unbelievable how irresponsible the mortgage industry has acted over the last five years. "Doctor your appraisals"? Unbelievable.
So this is what we have: we have previous appraisals that inflate the price. Then, people refinance their current mortgage because they have all that extra equity to play with. Except that their homes aren't really worth as much money as they thought. They spend their re-fi money on home improvements or vacations or big screen televisions or a new car, and then they decide to sell their house. An appraiser comes out again, no more than two years later and appraises the house at thousands of dollars lower than the previous one. And then you see people who own property with a market value at $350,000, yet they owe $700,000. These kinds of practices are causing the shift in wealth from the middle class to the upper class. It's truly unbelievable how irresponsible the markets act when there isn't any regulations or oversight!
Oh, but the oversight was just late arriving:
The National Association of Mortgage Brokers (NAMB) addressed the issue last year, changing its bylaws to prohibit pressure on any other players in the transaction, including appraisers.
Maybe I'm an old-school thinker, but doesn't it sound a bit criminal to influence appraisers in the first place? I thought that was called 'fraud'.
"It's called 'hitting the number' - or inflating a home's value - and real estate appraisers who don't do it often enough can find it hard to make a living."
Yet another problem contributing to the housing boom/bust. So we combine appraisal fraud with relaxed lending standards and low interest rates and we get.........wait for it............
A Housing Bubble!
Gee! Who'd have thunk it:
In prepared testimony Tuesday before a Senate subcommittee on mortgage industry abuses, Alan Hummel, spokesman for the Appraisal Institute said 'Appraisers face pressure from various parties involved in mortgage transactions. They are told to doctor their appraisals or else never see work from those parties again.'"
It's absolutely unbelievable how irresponsible the mortgage industry has acted over the last five years. "Doctor your appraisals"? Unbelievable.
So this is what we have: we have previous appraisals that inflate the price. Then, people refinance their current mortgage because they have all that extra equity to play with. Except that their homes aren't really worth as much money as they thought. They spend their re-fi money on home improvements or vacations or big screen televisions or a new car, and then they decide to sell their house. An appraiser comes out again, no more than two years later and appraises the house at thousands of dollars lower than the previous one. And then you see people who own property with a market value at $350,000, yet they owe $700,000. These kinds of practices are causing the shift in wealth from the middle class to the upper class. It's truly unbelievable how irresponsible the markets act when there isn't any regulations or oversight!
Oh, but the oversight was just late arriving:
The National Association of Mortgage Brokers (NAMB) addressed the issue last year, changing its bylaws to prohibit pressure on any other players in the transaction, including appraisers.
Maybe I'm an old-school thinker, but doesn't it sound a bit criminal to influence appraisers in the first place? I thought that was called 'fraud'.
Exotic Security Classes, Balloon Payments, and Prepayment Penalty
This quote (from an article I referenced in my last post) caught my eye:
"CRL also found that more than two thirds of the subprime loans it looked at contained prepayment penalties. By charging borrowers up to six months of mortgage payments to retire mortgages, prepayment penalties lock borrowers into onerous loans by making it very expensive to refinance out of them and into a lower-rate fixed."
Prepayment penalties are a result of a CDO market making every attempt to minimize risk. Let's look at a couple of exotic securities available: IOs (interest only) and POs (principle only). Consider the following example: Bank 'A' created $100 million worth of mortgages. The mortgages are for 8 years at 8% with a balloon payment at the end. The bank takes those debt obligations, pools them together, and sells them to an intermediary who creates different asset classes depending on the cash flow expected from the borrower. The two equations below outline the yearly payment plan for two different asset classes. The top equation is the payment schedule for the investor who buys an IO security; the majority of their return comes from the interest paid by the borrower. The bottom equation is the payment schedule for the investor who buys a PO security; the majority of their return comes from the principle payment in the form of the balloon payment at the end of eight years.
You may have noticed that 43.5 and 55.7 is 99.2, not 100. In the example, the intermediary takes 0.8 as payment for administering the asset classes.
Prepayment penalties on mortgages are meant to reduce the risk. In our example, when borrowers refinance, the owners of the PO security class get their return without having to wait out the eight years, but the IO class is left with a bad investment as less interest is paid, causing a declining return on capital. Conversely, when the borrowers extend their loan, the IO class reaps the rewards as they continue to collect interest, while the PO class is forced to wait for their return.
What happens when the borrower defaults on the mortgage? A portion of the security becomes worthless. When there are record defaults, these securities will have big problems.
There's much more default risk undertaken by the PO class as 87 percent of their return depends on the balloon payment. There's default risk with the IO class as well, but that risk diminishes with each successive year.
There are some hedge funds that are heavily invested in these types of securities. The companies operating them will be the ones that suffer tremendously as foreclosure rates increase further, and they will. The beginning of the great mortgage reset has just begun and with more subprime mortgages being issued, the problem will continue.
At the beginning of this post, I referenced a CNN Money article that described a subprime mortgage market who hadn't learned their lesson. The lesson won't be learned until we reform the CDO market. Much like the illegal drug industry, as long as there is demand for these types of exotic investments, there will be a supply of exotic mortgages.
"CRL also found that more than two thirds of the subprime loans it looked at contained prepayment penalties. By charging borrowers up to six months of mortgage payments to retire mortgages, prepayment penalties lock borrowers into onerous loans by making it very expensive to refinance out of them and into a lower-rate fixed."
Prepayment penalties are a result of a CDO market making every attempt to minimize risk. Let's look at a couple of exotic securities available: IOs (interest only) and POs (principle only). Consider the following example: Bank 'A' created $100 million worth of mortgages. The mortgages are for 8 years at 8% with a balloon payment at the end. The bank takes those debt obligations, pools them together, and sells them to an intermediary who creates different asset classes depending on the cash flow expected from the borrower. The two equations below outline the yearly payment plan for two different asset classes. The top equation is the payment schedule for the investor who buys an IO security; the majority of their return comes from the interest paid by the borrower. The bottom equation is the payment schedule for the investor who buys a PO security; the majority of their return comes from the principle payment in the form of the balloon payment at the end of eight years.
You may have noticed that 43.5 and 55.7 is 99.2, not 100. In the example, the intermediary takes 0.8 as payment for administering the asset classes.Prepayment penalties on mortgages are meant to reduce the risk. In our example, when borrowers refinance, the owners of the PO security class get their return without having to wait out the eight years, but the IO class is left with a bad investment as less interest is paid, causing a declining return on capital. Conversely, when the borrowers extend their loan, the IO class reaps the rewards as they continue to collect interest, while the PO class is forced to wait for their return.
What happens when the borrower defaults on the mortgage? A portion of the security becomes worthless. When there are record defaults, these securities will have big problems.
There's much more default risk undertaken by the PO class as 87 percent of their return depends on the balloon payment. There's default risk with the IO class as well, but that risk diminishes with each successive year.
There are some hedge funds that are heavily invested in these types of securities. The companies operating them will be the ones that suffer tremendously as foreclosure rates increase further, and they will. The beginning of the great mortgage reset has just begun and with more subprime mortgages being issued, the problem will continue.
At the beginning of this post, I referenced a CNN Money article that described a subprime mortgage market who hadn't learned their lesson. The lesson won't be learned until we reform the CDO market. Much like the illegal drug industry, as long as there is demand for these types of exotic investments, there will be a supply of exotic mortgages.
Subprime Mortgage Abuse Continues
Will they ever learn? The subprime vultures just won't quit:
"At a Senate subcommittee hearing on ending mortgage abuse this week, the Center for Responsible Lending (CRL) presented its findings on subprime loans included in 10 recent packages of mortgage backed securities."
Gasp! Gasp! The mortgage industry is running out of breath. They're desperate, and their desperation is producing ugly results. Where will it lead our economy?
"At a Senate subcommittee hearing on ending mortgage abuse this week, the Center for Responsible Lending (CRL) presented its findings on subprime loans included in 10 recent packages of mortgage backed securities."
"'A lot of the terms that make these loans so dangerous are still being used,' said Keith Armstrong, CRL's senior policy counsel. 'We had been told that these things are going away.'"
You can't teach an old dog new tricks? How much worse will this get? When will people finally learn their lesson? This new development is indicative of the fact that we've only just begun the shakeout; in fact, as long as the practices continue, the problems will continue.
The impression left from the last six months of subprime lenders becoming subprime companies wasn't really an impression at all.
Gasp! Gasp! The mortgage industry is running out of breath. They're desperate, and their desperation is producing ugly results. Where will it lead our economy?
Beazer Fires Chief Accountant
Wow. Simply wow. Beazer Homes is in deep:
"Beazer Homes USA Inc., a homebuilder that's under investigation by the FBI for potential fraud, fired its chief accounting officer for violating the company's ethics policy by attempting to destroy documents."
The investigation is a result of offering mortgages to prospective home buyers based on expected future earnings, which is prohibited. It's bad enough for the company that they happen to be a homebuilder in a slumping housing market. Adding the fact that the company is under investigation and the fact that the CAO just got canned for attempting to destroy documents makes for a tough case. On top of all that, inventory makes up around eighty percent of Beazer Homes' assets.
This is an easy one - sell Beazer (BZH). The company closed trading today at $28.54, which is at the lower end of the 52 week range ($27.32-48.60). Still, after all is said and done, I think the stock will be trading closer to $20 than to $30.
"Beazer Homes USA Inc., a homebuilder that's under investigation by the FBI for potential fraud, fired its chief accounting officer for violating the company's ethics policy by attempting to destroy documents."
The investigation is a result of offering mortgages to prospective home buyers based on expected future earnings, which is prohibited. It's bad enough for the company that they happen to be a homebuilder in a slumping housing market. Adding the fact that the company is under investigation and the fact that the CAO just got canned for attempting to destroy documents makes for a tough case. On top of all that, inventory makes up around eighty percent of Beazer Homes' assets.
This is an easy one - sell Beazer (BZH). The company closed trading today at $28.54, which is at the lower end of the 52 week range ($27.32-48.60). Still, after all is said and done, I think the stock will be trading closer to $20 than to $30.
S-E-C: 12 Investigations Launched!
The SEC probe is much larger than just Bear Stearns:
"The Securities and Exchange Commission has launched about a dozen investigations related to securities backed by sub-prime mortgages, SEC Chairman Christopher Cox said Tuesday."
Twelve investigations is a lot and it helps to prove the point I made earlier in the week: the subprime CDO fiasco is going to be MUCH larger than most expect.
"Thus far in 2007, he said, the SEC has imposed fines in nine cases. The agency's record for cases with fines imposed in an entire year is 11."
I can't see how this year won't be a record-breaker. There's still six months of subprime unwind and defaults are on the rise. Plus, the SEC is defending itself against accusations that the commission favors business. Regardless of whether the accusations are true, the fact that they exist means there's a good chance the SEC will be unfavorable to business.
"The Securities and Exchange Commission has launched about a dozen investigations related to securities backed by sub-prime mortgages, SEC Chairman Christopher Cox said Tuesday."
Twelve investigations is a lot and it helps to prove the point I made earlier in the week: the subprime CDO fiasco is going to be MUCH larger than most expect.
"Thus far in 2007, he said, the SEC has imposed fines in nine cases. The agency's record for cases with fines imposed in an entire year is 11."
I can't see how this year won't be a record-breaker. There's still six months of subprime unwind and defaults are on the rise. Plus, the SEC is defending itself against accusations that the commission favors business. Regardless of whether the accusations are true, the fact that they exist means there's a good chance the SEC will be unfavorable to business.
Tuesday, June 26, 2007
Another quick look at CDOs
It's finally come. The SEC is investigating securities fraud stemming from the sub prime loan debacle. Finally some accountability, though perhaps it's too little too late:
"Last week, Cox revealed in an interview that the SEC was looking into the problems at the two Bear hedge funds. Bear said last week that it would provide up to $3.2 billion in financing for one of the funds after the investment bank discovered that the underlying value of the assets was much less than it had believed.
Collateralized debt obligations are extremely illiquid and have no true market price. The sellers value the securities based on models that use ratings from the credit agencies to judge the risk that they will go sour. Buyers have little idea what the underlying assets are, or what they should be valued at."
Ahh, I see. The article continues, mentioning Blackstone:
"In a wide-ranging oversight hearing before the House Financial Services Committee, Cox and the other four SEC commissioners defended the agency on a host of issues ranging from reform of the Sarbanes-Oxley corporate governance law to the approval of a public offering by Blackstone Group LLP".
I have been wondering why the Blackstone Group went public when it did. The market's much closer to the top than it is the bottom. Prior to going public, the company unloaded a whole helluva lot of real estate in the Chicago area as well as the Western region. I suppose they wished to reduce debt, which in turn would make them more attractive for their IPO. A more attractive IPO means a higher bid price, which means they raise more capital which means the principals of the company reap massive benefits. Right? And if this company were heavily invested in the subprime mortgage fiasco, going public would be the best thing for the principals as all that investment money coming in would create upward pressure on the initial price of the stock. Maybe we will see the shortest lifespan ever of a public company, but I don't know.
Yesterday, I wanted to lump Blackstone in with the other four investment firms I previously mentioned. I had a feeling that Blackstone would drop immediately, but then I thought: no, it's a new stock, people will buy no matter the price because it's *NEW*. I guess I should have followed my instincts. Despite being priced below their IPO price, I think the stock will rebound considerably, regardless of market conditions. But I do think this company is suspect. At this point, I do not think a savvy investor would sell or short Blackstone. It is one that I will watch closely and I will give you an update as soon as I've jumped off the fence.
"Last week, Cox revealed in an interview that the SEC was looking into the problems at the two Bear hedge funds. Bear said last week that it would provide up to $3.2 billion in financing for one of the funds after the investment bank discovered that the underlying value of the assets was much less than it had believed.
Collateralized debt obligations are extremely illiquid and have no true market price. The sellers value the securities based on models that use ratings from the credit agencies to judge the risk that they will go sour. Buyers have little idea what the underlying assets are, or what they should be valued at."
Ahh, I see. The article continues, mentioning Blackstone:
"In a wide-ranging oversight hearing before the House Financial Services Committee, Cox and the other four SEC commissioners defended the agency on a host of issues ranging from reform of the Sarbanes-Oxley corporate governance law to the approval of a public offering by Blackstone Group LLP".
I have been wondering why the Blackstone Group went public when it did. The market's much closer to the top than it is the bottom. Prior to going public, the company unloaded a whole helluva lot of real estate in the Chicago area as well as the Western region. I suppose they wished to reduce debt, which in turn would make them more attractive for their IPO. A more attractive IPO means a higher bid price, which means they raise more capital which means the principals of the company reap massive benefits. Right? And if this company were heavily invested in the subprime mortgage fiasco, going public would be the best thing for the principals as all that investment money coming in would create upward pressure on the initial price of the stock. Maybe we will see the shortest lifespan ever of a public company, but I don't know.
Yesterday, I wanted to lump Blackstone in with the other four investment firms I previously mentioned. I had a feeling that Blackstone would drop immediately, but then I thought: no, it's a new stock, people will buy no matter the price because it's *NEW*. I guess I should have followed my instincts. Despite being priced below their IPO price, I think the stock will rebound considerably, regardless of market conditions. But I do think this company is suspect. At this point, I do not think a savvy investor would sell or short Blackstone. It is one that I will watch closely and I will give you an update as soon as I've jumped off the fence.
Lennar's Losses
Surprise, Surprise. Earlier today, Lennar announced it’s quarterly earnings, a loss of $244.2 million:
“Lennar Corp. said Tuesday it swung to a quarterly loss, blaming impairment charges and growing inventories of homes for sale which are pushing prices lower and further squeezing margins.”
Home Prices Fall...AGAIN!
The light at the end of the tunnel is further than you think. April marked the 17th month in a row that home prices have dropped:
"The April sales figures show that 14 of 20 cities reported prices had dropped or remained flat compared to 2006, S&P said. 'No region is immune to the weakening price returns,' MacroMarkets Chief Economist Robert Shiller said in a statement."
Does this mean that there is a national housing bubble? I remember Michael Youngblood discussing the possibility of a national housing bubble:
"It's overblown because there is no national housing market, so there can't be a national house-price bubble."
That's an interesting point. The article also stated that Michael works at Friedman Billings Ramsey & Co. as the managing director of asset-backed securities research. That company has lost 44 percent of it's value since the date of the article.
We report, you decide.
Monday, June 25, 2007
Nursing Shortage
This article discusses the looming shortage of nurses and how to profit from it, suggesting two companies who staff nurses and other health professionals:
"THE aging baby boomers will set off any number of health-care booms, and staffing companies that place nurses in hospitals are among the most obvious beneficiaries. But investors needn't go gray waiting for those demographic trends to bear fruit, not with AMN Healthcare Services and Cross Country Healthcare poised to ride a near-term cyclical upswing."
"This can't help but be a healthy niche in the long run. It's a sad fact of life, but the boomers, those 78 million Americans born between 1946 and 1964, will be spending more and more time in hospitals in the coming years. When you consider that the number of Americans in the 55-to-64 age group is expected to expand 40% by 2014, it's no wonder hospitals are in the midst of a $100 billion construction boom, their biggest in years."
My closest friend happens to be a nurse, recently graduated. The demand for nurses is incredible. She had a job in place two months before graduating, as did most of her classmates. And the pay was none too shabby. If only for that reason, I recommend dipping a few toes in each of these stocks. So finally, after recommending many sells, I've found a couple investments to buy. AMN Healthcare Services (AHS) closed trading today at $22.41. Cross Country Healthcare (CCRN) closed trading today at $16.85.
"THE aging baby boomers will set off any number of health-care booms, and staffing companies that place nurses in hospitals are among the most obvious beneficiaries. But investors needn't go gray waiting for those demographic trends to bear fruit, not with AMN Healthcare Services and Cross Country Healthcare poised to ride a near-term cyclical upswing."
"This can't help but be a healthy niche in the long run. It's a sad fact of life, but the boomers, those 78 million Americans born between 1946 and 1964, will be spending more and more time in hospitals in the coming years. When you consider that the number of Americans in the 55-to-64 age group is expected to expand 40% by 2014, it's no wonder hospitals are in the midst of a $100 billion construction boom, their biggest in years."
My closest friend happens to be a nurse, recently graduated. The demand for nurses is incredible. She had a job in place two months before graduating, as did most of her classmates. And the pay was none too shabby. If only for that reason, I recommend dipping a few toes in each of these stocks. So finally, after recommending many sells, I've found a couple investments to buy. AMN Healthcare Services (AHS) closed trading today at $22.41. Cross Country Healthcare (CCRN) closed trading today at $16.85.
Mortgage Rate Reset
It's amazing the way things are unwinding: very slowly and very predictable. This could have served as a warning of things to come for Bear Stearns:
"Bear Stearns Funds Own 67 Percent Stake in Everquest"
"Funds run by Bear Stearns Cos. own two- thirds of Everquest Financial Ltd., a firm that invests in debt backed by subprime mortgages and buyout loans"
On May 11th, the same day the article was published, Bear Stearns closed at $156.40. At the end of trading today, Bear closed at $139.10; Bear has lost 11 percent of it's value since May 11. It will continue to drop, we'll see where the bottom is. This chart, found on page 47, is dated March 12, 2007:
Looking at the graph, we can see that the fifth month, May 2007, was about the starting point to a rough time for homeowners with adjustable rate mortgages. As if on cue, foreclosures jumped 19 percent from April to May. If this chart is an indicator of times to come, the late summer will see another spike in mortgage resets, which should lead to an increased foreclosure rate.
Financial institutions and hedge funds that hold those mortgages should get hit harder in a few months than they are right now. This article (which I've referenced before), implicates JP Morgan Chase, Citigroup, and Merrill Lynch in the Bear Stearns fiasco, which is just picking up speed. I'm bearish on all four. I've already recommended selling Bear Stearns. Now I recommend selling the other three. This article implicates Goldman Sachs. Sell Goldman Sachs. There will be companies that will end up with the bad debt - it doesn't just disappear. A bailout from the government, a possibility depending on the severity of defaults, would be very beneficial for gold (which I've previously recommended buying).
Citigroup (C) ended trading today at $51.69. Merrill Lynch (MER) ended trading today at $83.98. JP Morgan Chase (JPM) ended trading today at $48.36. Goldman Sachs (GS) ended trading today at $216.74
"Bear Stearns Funds Own 67 Percent Stake in Everquest"
"Funds run by Bear Stearns Cos. own two- thirds of Everquest Financial Ltd., a firm that invests in debt backed by subprime mortgages and buyout loans"
On May 11th, the same day the article was published, Bear Stearns closed at $156.40. At the end of trading today, Bear closed at $139.10; Bear has lost 11 percent of it's value since May 11. It will continue to drop, we'll see where the bottom is. This chart, found on page 47, is dated March 12, 2007:
Looking at the graph, we can see that the fifth month, May 2007, was about the starting point to a rough time for homeowners with adjustable rate mortgages. As if on cue, foreclosures jumped 19 percent from April to May. If this chart is an indicator of times to come, the late summer will see another spike in mortgage resets, which should lead to an increased foreclosure rate.
Financial institutions and hedge funds that hold those mortgages should get hit harder in a few months than they are right now. This article (which I've referenced before), implicates JP Morgan Chase, Citigroup, and Merrill Lynch in the Bear Stearns fiasco, which is just picking up speed. I'm bearish on all four. I've already recommended selling Bear Stearns. Now I recommend selling the other three. This article implicates Goldman Sachs. Sell Goldman Sachs. There will be companies that will end up with the bad debt - it doesn't just disappear. A bailout from the government, a possibility depending on the severity of defaults, would be very beneficial for gold (which I've previously recommended buying).
Citigroup (C) ended trading today at $51.69. Merrill Lynch (MER) ended trading today at $83.98. JP Morgan Chase (JPM) ended trading today at $48.36. Goldman Sachs (GS) ended trading today at $216.74
iPhone Update
Last week, I said it would be wise to sell Apple, due to the fact that the stock's price has been driven by the over-hyped, over-priced iPhone. Today, Bloomberg explores the possibility that the iPhone won't live up to investor expectations:
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. I think Apple could sell three million units by the end of the year, especially if retail does well during the holiday season, and ten million over the course of 2008 is a very real expectation. In the short term, I still recommend selling Apple.
"Apple may sell as many as 200,000 iPhones in the product's first two days on the market this week and as many as 3 million in the second half of the year, according to the most optimistic analyst estimates. Apple, in its only public forecast, says it plans to sell 10 million next year.
Sales at those levels would outdo the iPod, Apple's best- selling product to date, for comparable periods. The danger is that Apple may fall short of projections for initial sales and damp investor enthusiasm for the product."
I have serious doubts that iPhone sales will out pace the iPod over comparable periods. As I said previously, I think the current price of the phone is too high. In addition to the price is the fact that the phone is only available on one wireless network, AT+T; consumers on other wireless networks would have to pay a fee to cancel their current contract. These two facts don't bode well for short term sales. Reuters agrees:
"Worries over the high cost, slow network speed, and battery life are deterring some customers from ponying up a minimum of $499 for the device, despite the buzz across the gadget-crazed landscape of tech retail."
"But the phone does not work on AT&T's fastest network, which runs on so-called 3-G technology. That, some said, will make Web-browsing slower than phones running on other networks.
"...Apple has a track record of rolling out new, improved and cheaper models, such as the later versions of its iPod digital music and video players. Apple will likely do the same with iPhone..."I think the iPhone will sell closer to 150,000 units over the first two days. The longer-term sales expectations should be easier to meet as prices go down and as people's wireless contracts end. I think Apple could sell three million units by the end of the year, especially if retail does well during the holiday season, and ten million over the course of 2008 is a very real expectation. In the short term, I still recommend selling Apple.
Saturday, June 23, 2007
Weekend Video
Housing Bubble: Market Crashing in Slow Motion:
Housing Bubble versus the Great Depression:
Our Economy Right Now:
Housing Bubble versus the Great Depression:
Our Economy Right Now:
Friday, June 22, 2007
Are You Saving Too Much??
Are you saving too much? That is the stupidest question I've heard in a long time. And this is coming from the 'personal finance' department at Yahoo (via Fortune). Americans have had a negative personal savings rate since April of 2005. Why else would there be a credit bubble?
These articles certainly don't help; they only feed into the consumerist ideals that have driven the economy for the better half of two decades. Contrast that headline to this one: Retire at 40: Here's How. This article is much more worth your while:
"If you were to take 20% of your annual income starting at age 20 and put it in a fund following the S&P 500 Index ($INX), that fund continued to grow at the long-term historical rate (12%) and you received a 4% raise each year, you could walk away from your job and live off the interest at age 41 matching your current salary -- or quit at 43 and be able to give yourself a 4% "raise" each year from the interest, which is probably the better plan because it combats inflation."
One article teaches you how to be poor, while the other article teaches you how to be rich. It's your choice.
These articles certainly don't help; they only feed into the consumerist ideals that have driven the economy for the better half of two decades. Contrast that headline to this one: Retire at 40: Here's How. This article is much more worth your while:
"If you were to take 20% of your annual income starting at age 20 and put it in a fund following the S&P 500 Index ($INX), that fund continued to grow at the long-term historical rate (12%) and you received a 4% raise each year, you could walk away from your job and live off the interest at age 41 matching your current salary -- or quit at 43 and be able to give yourself a 4% "raise" each year from the interest, which is probably the better plan because it combats inflation."
One article teaches you how to be poor, while the other article teaches you how to be rich. It's your choice.
Seventy Percent Say Economy Worsening
From Gallup comes this latest poll showing that seven out of ten Americans believes the economy is getting worse:
"The perception that the U.S. economy is getting worse has now reached as high a level as at any point since 2001. Seventy percent of Americans say conditions are getting worse. While this is statistically similar to the 67% saying this last month, it is up 10 points since April."
Ten points since April is a big jump in a small amount of time, and it's a great indicator of the economic conditions for the majority of the country. Don't forget that 2001 was a year of recession, and although 9/11 played a role in the economic recession, it didn't play a role in the pessimistic view people held back then:
"The last time Americans held such negative views was in early September 2001, just before the terrorist attacks on Sept. 11."
We shall see if the majority of Americans are right or wrong about the economy in the coming months. Either seventy percent of the population influences markets or thirty percent does. So far, it's been the thirty percent.
"The perception that the U.S. economy is getting worse has now reached as high a level as at any point since 2001. Seventy percent of Americans say conditions are getting worse. While this is statistically similar to the 67% saying this last month, it is up 10 points since April."
Ten points since April is a big jump in a small amount of time, and it's a great indicator of the economic conditions for the majority of the country. Don't forget that 2001 was a year of recession, and although 9/11 played a role in the economic recession, it didn't play a role in the pessimistic view people held back then:
"The last time Americans held such negative views was in early September 2001, just before the terrorist attacks on Sept. 11."
We shall see if the majority of Americans are right or wrong about the economy in the coming months. Either seventy percent of the population influences markets or thirty percent does. So far, it's been the thirty percent.
CDOs and Subprime Loans
Via Barry Ritholtz at Seeking Alpha comes this quote from Bloomberg regarding Merrill Lynch's sale of Bear Stearns' mortgage securities:
A sale would give banks, brokerages and investors the one thing they want to avoid: a real price on the bonds in the fund that could serve as a benchmark. The securities are known as collateralized debt obligations, which exceed $1 trillion and comprise the fastest-growing part of the bond market.
You see, it turns out that the securities' price figures really don't reflect their true value.
Because there is little trading in the securities, prices may not reflect the highest rate of mortgage delinquencies in 13 years. An auction that confirms concerns that CDOs are overvalued may spark a chain reaction of writedowns that causes billions of dollars in losses for everyone from hedge funds to pension funds to foreign banks. (Bold type is mine)
I guess that's why JP Morgan canceled a Bear fund asset auction. There is a needed price correction in the CDO market and it will happen eventually. Until then, high level executives will do everything in their power to delay the inevitable.
A sale would give banks, brokerages and investors the one thing they want to avoid: a real price on the bonds in the fund that could serve as a benchmark. The securities are known as collateralized debt obligations, which exceed $1 trillion and comprise the fastest-growing part of the bond market.
You see, it turns out that the securities' price figures really don't reflect their true value.
Because there is little trading in the securities, prices may not reflect the highest rate of mortgage delinquencies in 13 years. An auction that confirms concerns that CDOs are overvalued may spark a chain reaction of writedowns that causes billions of dollars in losses for everyone from hedge funds to pension funds to foreign banks. (Bold type is mine)
I guess that's why JP Morgan canceled a Bear fund asset auction. There is a needed price correction in the CDO market and it will happen eventually. Until then, high level executives will do everything in their power to delay the inevitable.
Thursday, June 21, 2007
A Stampede of Bulls(hit)
Is there any member of the Bush Administration who isn't delusional and incompetent? If there is, it's not our Treasury Secretary:
"The major slump in the housing market is nearing an end and should not have a significant impact on the overall economy, Treasury Secretary Henry Paulson said Wednesday."
Sure Hank, whatever you say...
"We have had a major housing correction in this country," Paulson said in an interview with a small group of reporters at the Treasury Department. "I do believe we are at or near the bottom."
So, we have Hank P. trying to assure us that we are at or near the bottom of the housing correction. Now let's hear Ara Hovnanian, CEO for K Hovnanian Homebuilder, weigh in:
"There is not a recovery that is about to happen.''
Hmmm. And what about the recent homebuilder confidence index? Maybe that press release hasn't made it to Mr. Paulson's desk yet.
But back to Ara. He might be the only CEO willing to speak to the media about the current housing 'slump'. From CNBC comes this report:
"I'm blogging to you...in mid-town Manhattan, where I've never in my life seen so many freaked out CEOs. I say this only because not nine months ago I attended a similar UBS conference, where the homebuilder CEOs and their CFOs and their PR reps and their baggage handlers and their mother-in-laws were all fighting with each other to jump in front of our cameras to talk about the recovery shining brightly ahead in the housing market."
CEOs from Ryland Homes, Standard Pacific Corp, and DR Horton all refused to answer press questions regarding the current 'slump'. I guess if you don't have anything nice to say, don't say anything at all?
*************************************************************
From another bull comes this headline: "US Economy to Expand in Coming Months". Please tell me more:
"The U.S. economy should expand modestly in coming months as a healthy job market continues to trump weakness in housing prices, a gauge of future business activity showed on Thursday."
But Wait! What about this:
"Initial jobless claims rose by 10,000, a third consecutive increase, to 324,000 in the week ended June 16, the Labor Department said today in Washington."
Oh, I see you explain it by saying this:
"While the big increase was unexpected, analysts said it did not change their view that the labor market remains hardy."
So a "healthy job market" entails a "big increase" in jobless claims?? Oh well, they're the analysts, right? I'm sure any objections I voice can be explained away somehow or another...
*************************************************************
Not to be outdone, Marketwatch had this headline: "US Economy Weathered the Worst, Index Shows". This is great! Maybe these main stream perma-bulls have changed my mind after all:
"'These data may be suggesting that the economy has weathered the negative impact of the housing slump and the spring run-up in gas prices,' said Ken Goldstein, labor economist at the Conference Board."
Do "labor economists" specialize in energy or real estate? I always thought they were job market specialists. I'm not saying the man doesn't have the authority to speak on topics other than the job market, but it would've sold the story more if the guy commenting on gas prices was an "energy economist", or if the guy commenting on the housing market was a "real estate economist".
There are a few problems with what Ken said and what he didn't say.
What he said: the economy has weathered the housing 'slump'. What he didn't say: the housing 'slump' is far from over.
What he said: the economy has weathered the run-up in gas prices. What he didn't say: we don't know how long this 'run-up' will last or if the 'run-up' is done running up.
*************************************************************
The spin-cycle is running on high these days. Don't let the bulls confuse you.
"The major slump in the housing market is nearing an end and should not have a significant impact on the overall economy, Treasury Secretary Henry Paulson said Wednesday."
Sure Hank, whatever you say...
"We have had a major housing correction in this country," Paulson said in an interview with a small group of reporters at the Treasury Department. "I do believe we are at or near the bottom."
So, we have Hank P. trying to assure us that we are at or near the bottom of the housing correction. Now let's hear Ara Hovnanian, CEO for K Hovnanian Homebuilder, weigh in:
"There is not a recovery that is about to happen.''
Hmmm. And what about the recent homebuilder confidence index? Maybe that press release hasn't made it to Mr. Paulson's desk yet.
But back to Ara. He might be the only CEO willing to speak to the media about the current housing 'slump'. From CNBC comes this report:
"I'm blogging to you...in mid-town Manhattan, where I've never in my life seen so many freaked out CEOs. I say this only because not nine months ago I attended a similar UBS conference, where the homebuilder CEOs and their CFOs and their PR reps and their baggage handlers and their mother-in-laws were all fighting with each other to jump in front of our cameras to talk about the recovery shining brightly ahead in the housing market."
CEOs from Ryland Homes, Standard Pacific Corp, and DR Horton all refused to answer press questions regarding the current 'slump'. I guess if you don't have anything nice to say, don't say anything at all?
*************************************************************
From another bull comes this headline: "US Economy to Expand in Coming Months". Please tell me more:
"The U.S. economy should expand modestly in coming months as a healthy job market continues to trump weakness in housing prices, a gauge of future business activity showed on Thursday."
But Wait! What about this:
"Initial jobless claims rose by 10,000, a third consecutive increase, to 324,000 in the week ended June 16, the Labor Department said today in Washington."
Oh, I see you explain it by saying this:
"While the big increase was unexpected, analysts said it did not change their view that the labor market remains hardy."
So a "healthy job market" entails a "big increase" in jobless claims?? Oh well, they're the analysts, right? I'm sure any objections I voice can be explained away somehow or another...
*************************************************************
Not to be outdone, Marketwatch had this headline: "US Economy Weathered the Worst, Index Shows". This is great! Maybe these main stream perma-bulls have changed my mind after all:
"'These data may be suggesting that the economy has weathered the negative impact of the housing slump and the spring run-up in gas prices,' said Ken Goldstein, labor economist at the Conference Board."
Do "labor economists" specialize in energy or real estate? I always thought they were job market specialists. I'm not saying the man doesn't have the authority to speak on topics other than the job market, but it would've sold the story more if the guy commenting on gas prices was an "energy economist", or if the guy commenting on the housing market was a "real estate economist".
There are a few problems with what Ken said and what he didn't say.
What he said: the economy has weathered the housing 'slump'. What he didn't say: the housing 'slump' is far from over.
What he said: the economy has weathered the run-up in gas prices. What he didn't say: we don't know how long this 'run-up' will last or if the 'run-up' is done running up.
*************************************************************
The spin-cycle is running on high these days. Don't let the bulls confuse you.
Wednesday, June 20, 2007
"Bloodbath" Economy Predicted
From Bloomberg comes this telling article:
"The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported."
"New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group".
They go so far as to describe the coming financial problems as a bloodbath. Yikes! The bears are coming home to roost. And this coming from the NAR means it's one of the rosier outlooks. I think Standard Pacific Corp (SPF) is the most susceptible of the public homebuilders. A Credit Suisse analysis from March 2007 (PowerPoint required, download viewer), reveals that 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. If fifty percent of your potential client base can no longer get a loan because of rising interest rates or tightened lending standards, your company is in serious trouble. A look at quarterly earnings reports from KB Homes, Lennar, and DR Horton reveal income declines, but at least those companies are still profitable. Standard Pacific's quarterly report shows a company that lost forty million dollars in the first quarter of 2007. Standard Pacific holds $3.3 billion in inventory.
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?? Standard Pacific closed trading today at $18.67.
I'm bearish on the other homebuilders also. Remember the beginning of the housing boom? I do. I remember KB Homes trading at $20 in January of '02. They closed today at $42.18. I remember DR Horton trading at $10 in January of '02. They closed today at $21.01. I remember Lennar trading at $23 in January of '02. They closed today at $40.96. Considering the long road ahead, are these companies really worth the price they're trading at today? I bet Maya Roney thinks so. She asks the question: "Is the Worst Behind Us?"
"Stronger economic fundamentals -- job growth, relatively low interest rates -- may ward off a true "housing bust" this time, though the decline in May starts may postpone any housing upturn until late 2007 or early 2008."
Leave it to the bulls to act like ostriches! So we're not going through a "true housing bust" yet? Our interest rates are "relatively low"? They're relatively high over the last six years. And job growth means nothing if wages stagnate. We could have a zero unemployment rate with everyone working for minimum wage, but that doesn't mean they'd be able to afford a home.
What we have today is upward trending interest rates, decreasing sales, decreasing prices, and rising inventories. KB Homes holds 6.2 billion dollars worth of inventory. DR Horton holds 11.2 billion dollars worth of inventory. 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 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. I expect them to survive the housing bust, but they're overvalued now and I would sell all three.
"The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, the National Association of Realtors reported."
"New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group".
They go so far as to describe the coming financial problems as a bloodbath. Yikes! The bears are coming home to roost. And this coming from the NAR means it's one of the rosier outlooks. I think Standard Pacific Corp (SPF) is the most susceptible of the public homebuilders. A Credit Suisse analysis from March 2007 (PowerPoint required, download viewer), reveals that 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. If fifty percent of your potential client base can no longer get a loan because of rising interest rates or tightened lending standards, your company is in serious trouble. A look at quarterly earnings reports from KB Homes, Lennar, and DR Horton reveal income declines, but at least those companies are still profitable. Standard Pacific's quarterly report shows a company that lost forty million dollars in the first quarter of 2007. Standard Pacific holds $3.3 billion in inventory.
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?? Standard Pacific closed trading today at $18.67.
I'm bearish on the other homebuilders also. Remember the beginning of the housing boom? I do. I remember KB Homes trading at $20 in January of '02. They closed today at $42.18. I remember DR Horton trading at $10 in January of '02. They closed today at $21.01. I remember Lennar trading at $23 in January of '02. They closed today at $40.96. Considering the long road ahead, are these companies really worth the price they're trading at today? I bet Maya Roney thinks so. She asks the question: "Is the Worst Behind Us?"
"Stronger economic fundamentals -- job growth, relatively low interest rates -- may ward off a true "housing bust" this time, though the decline in May starts may postpone any housing upturn until late 2007 or early 2008."
Leave it to the bulls to act like ostriches! So we're not going through a "true housing bust" yet? Our interest rates are "relatively low"? They're relatively high over the last six years. And job growth means nothing if wages stagnate. We could have a zero unemployment rate with everyone working for minimum wage, but that doesn't mean they'd be able to afford a home.
What we have today is upward trending interest rates, decreasing sales, decreasing prices, and rising inventories. KB Homes holds 6.2 billion dollars worth of inventory. DR Horton holds 11.2 billion dollars worth of inventory. 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 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. I expect them to survive the housing bust, but they're overvalued now and I would sell all three.
Sell Apple, Google
Two stocks I think are overvalued: Apple (AAPL) and Google (Goog).
They were both down during this past trading session; expect more of the same. The unreleased iPhone has priced itself out of the market at $499 for the 4 GB model. Furthermore, the 52 week range is $50.16 - $127.61. At the close of the market, Apple ended at $121.55. There's reason to believe that the price will decline as more bears flood the market. I expect the stock to retreat to under $100 over the next few months.
As for Google, the stock is priced above $500 with a P/E of almost 45. I think expectations are too high and the downside risk is too large. Google closed Wednesday at $509.97. My target price is around $400.
As we enter the summer months, stocks tend to under perform. Sell them both.
They were both down during this past trading session; expect more of the same. The unreleased iPhone has priced itself out of the market at $499 for the 4 GB model. Furthermore, the 52 week range is $50.16 - $127.61. At the close of the market, Apple ended at $121.55. There's reason to believe that the price will decline as more bears flood the market. I expect the stock to retreat to under $100 over the next few months.
As for Google, the stock is priced above $500 with a P/E of almost 45. I think expectations are too high and the downside risk is too large. Google closed Wednesday at $509.97. My target price is around $400.
As we enter the summer months, stocks tend to under perform. Sell them both.
More Mortgage Woes
Subprime mortgages claim another victim?
"Two large hedge funds managed by investment bank and brokerage Bear Stearns are close to being shut down as their complex mortgage-related bets have soured, the Wall Street Journal reported."
"More than 30 subprime lenders, including New Century, have gone bankrupt this year."
And I also found this:
"New Century is among more than 50 lenders that have halted operations, gone bankrupt or sought buyers since the start of 2006, according to Bloomberg data."
As if it weren't common sense, I recommend selling Bear Stearns (BSC). The stock is currently trading at $145.01, a loss of about one percent since the start of trading. To not see more of a precipitous drop is a case of blind bullishness.
Updated June 20, 2007 1:25 PM:
Bear Stearns closed the trading day at $143.20.
"Two large hedge funds managed by investment bank and brokerage Bear Stearns are close to being shut down as their complex mortgage-related bets have soured, the Wall Street Journal reported."
"The Journal said the two funds held over 20 bln of investments just a few weeks ago, mostly tied to risky securities linked to so-called subprime mortgages."
Twenty Billion in a matter of weeks...I'm sure the bulls will continue to look the other way; there will always be a tidbit of good news to blindly focus on. But this newest revelation is only a stepping stone on the way to more major problems. Just a few days earlier, I found this article which outlined a trend of rising delinquencies, particularly among ARMs. Here's the most disturbing part of the article (conveniently tucked down at the bottom):"More than 30 subprime lenders, including New Century, have gone bankrupt this year."
And I also found this:
"New Century is among more than 50 lenders that have halted operations, gone bankrupt or sought buyers since the start of 2006, according to Bloomberg data."
As if it weren't common sense, I recommend selling Bear Stearns (BSC). The stock is currently trading at $145.01, a loss of about one percent since the start of trading. To not see more of a precipitous drop is a case of blind bullishness.
Updated June 20, 2007 1:25 PM:
Bear Stearns closed the trading day at $143.20.
Tuesday, June 19, 2007
UCLA Survey: LA County Office Rents to Increase
According to the LA Times, a recent UCLA survey of real estate professionals indicates a coming increase in rents for office space in LA County:
"'Our panel believes the demand will grow faster than the supply all the way through 2010,' said UCLA economist Jerry Nickelsburg".
This bodes well for companies who own office space or are in the process of constructing office buildings in the greater LA area. I can think of two companies who stand to benefit: Maguire Properties and Arden Realty. Arden Realty was acquired by GE in 2006. The acquisition has made it harder to predict how much GE will benefit, assuming that the UCLA study is correct. Since Maguire is still structured as a REIT (it distributes at least 90 percent of it's taxable income to shareholders), and because of the recent activity, it's the company I'm more focused on. Months ago, Maguire Properties acquired a sizable portion of Southern California office space:
"The deal consists of two trophy downtown Los Angeles assets -- 550 South Hope and Two California Plaza -- and 22 Orange County buildings."
As time has passed, it's become apparent that the driving force behind the completion of the deal has been the two downtown buildings. On April 16, 2007, the company announced the disposition of five orange county office buildings; the sale was completed on May 29th. On May 21, 2007, Maguire announced the disposition of three more Orange County office buildings. The sale is pending. As the company sells off Orange County properties, it reduces its debt level and increases its attractiveness as an investment. And the two recent downtown acquisitions are only a small part of their impressive LA portfolio.
I do not recommend buying Maguire Properties (MPG) for now, but it's a stock to watch. Real estate hasn't been a popular investment lately and although the stock price is close to a 52 week low, it could go down further. Watch for an update as the real estate bubble unwinds.
"'Our panel believes the demand will grow faster than the supply all the way through 2010,' said UCLA economist Jerry Nickelsburg".
This bodes well for companies who own office space or are in the process of constructing office buildings in the greater LA area. I can think of two companies who stand to benefit: Maguire Properties and Arden Realty. Arden Realty was acquired by GE in 2006. The acquisition has made it harder to predict how much GE will benefit, assuming that the UCLA study is correct. Since Maguire is still structured as a REIT (it distributes at least 90 percent of it's taxable income to shareholders), and because of the recent activity, it's the company I'm more focused on. Months ago, Maguire Properties acquired a sizable portion of Southern California office space:
"The deal consists of two trophy downtown Los Angeles assets -- 550 South Hope and Two California Plaza -- and 22 Orange County buildings."
As time has passed, it's become apparent that the driving force behind the completion of the deal has been the two downtown buildings. On April 16, 2007, the company announced the disposition of five orange county office buildings; the sale was completed on May 29th. On May 21, 2007, Maguire announced the disposition of three more Orange County office buildings. The sale is pending. As the company sells off Orange County properties, it reduces its debt level and increases its attractiveness as an investment. And the two recent downtown acquisitions are only a small part of their impressive LA portfolio.
I do not recommend buying Maguire Properties (MPG) for now, but it's a stock to watch. Real estate hasn't been a popular investment lately and although the stock price is close to a 52 week low, it could go down further. Watch for an update as the real estate bubble unwinds.
Housing Starts Fall in May
Via Bloomberg:
"Builders broke ground on new houses at an annual rate of 1.474 million, down 2.1 percent from the prior month, the Commerce Department said today in Washington. Building permits increased 3 percent to 1.501 million."
"The drop in starts was led by a 20 percent slump in the West. Construction also fell 1.6 percent in the South. Starts rose 16 percent in both the Northeast and Midwest."
On the heels of the latest decline in the builder's confidence index, we have more evidence to support the pessimistic mood.
"'Builders are really worried now, not only by the credit tightening in the mortgage market, but now all of a sudden by an increase in the fundamental mortgages as well,' David Seiders, chief economist at the National Association of Homebuilders said in an interview yesterday."
"'Without a doubt, things have slowed since about March,' said Ara Hovnanian, the builder's chief executive officer in an interview yesterday. 'There is not a recovery that is about to happen.'"
There are no truer words than "there is not a recovery that is about to happen". The housing market is highly illiquid; thus, price corrections take years. I don't anticipate any semblance of a recovery until at least May/June of '08, and I wouldn't be surprised if the downturn stretches into 2009. And there will be more casualties. Steven Church investigates:
"'The weakest publicly held builders are staying out of bankruptcy by relying on the profit they made when sales boomed, and on the public debt they sold in those years', said Ronald Greenspan".
"'The value of shareholder equity for some companies equals or exceeds the value of the undeveloped land that the companies have under contract', Greenspan said. 'As the housing downturn continues, that land will fall in value'".
Only time will tell which companies will be hit the hardest. StreetTracks homebuilder index (XHB) will be an interesting fund to watch. Currently, the fund is priced at $32.69. I believe it will lose at least 25 percent of it's value by the end of the year winding up in the $20 - $24 range.
Over the coming days, I'll be researching the publicly-traded home builders and will report what I find.
"Builders broke ground on new houses at an annual rate of 1.474 million, down 2.1 percent from the prior month, the Commerce Department said today in Washington. Building permits increased 3 percent to 1.501 million."
"The drop in starts was led by a 20 percent slump in the West. Construction also fell 1.6 percent in the South. Starts rose 16 percent in both the Northeast and Midwest."
On the heels of the latest decline in the builder's confidence index, we have more evidence to support the pessimistic mood.
"'Builders are really worried now, not only by the credit tightening in the mortgage market, but now all of a sudden by an increase in the fundamental mortgages as well,' David Seiders, chief economist at the National Association of Homebuilders said in an interview yesterday."
"'Without a doubt, things have slowed since about March,' said Ara Hovnanian, the builder's chief executive officer in an interview yesterday. 'There is not a recovery that is about to happen.'"
There are no truer words than "there is not a recovery that is about to happen". The housing market is highly illiquid; thus, price corrections take years. I don't anticipate any semblance of a recovery until at least May/June of '08, and I wouldn't be surprised if the downturn stretches into 2009. And there will be more casualties. Steven Church investigates:
"'The weakest publicly held builders are staying out of bankruptcy by relying on the profit they made when sales boomed, and on the public debt they sold in those years', said Ronald Greenspan".
"'The value of shareholder equity for some companies equals or exceeds the value of the undeveloped land that the companies have under contract', Greenspan said. 'As the housing downturn continues, that land will fall in value'".
Only time will tell which companies will be hit the hardest. StreetTracks homebuilder index (XHB) will be an interesting fund to watch. Currently, the fund is priced at $32.69. I believe it will lose at least 25 percent of it's value by the end of the year winding up in the $20 - $24 range.
Over the coming days, I'll be researching the publicly-traded home builders and will report what I find.
Monday, June 18, 2007
Housing Market Index at Lowest Level Since '91
More bad news for the housing market. The index came in with a reading of 28. The confidence index declined in three of the four regions; the northeast posted a three point increase, but still languishes at 35.
A reading above fifty means that a majority of homebuilders have a positive outlook for the industry.
The bottom has yet to come. Look out!
A reading above fifty means that a majority of homebuilders have a positive outlook for the industry.
The bottom has yet to come. Look out!
Credit Check...
Total consumer credit outstanding has increased by 57 percent since 2000. Contained in that is revolving credit debt (ie: credit cards), which has increased 44.5 percent since 2000. Mortgage debt has increased 105 percent since 2000.
Going further back, we can see that total credit has increased 205 percent since 1990. Revolving credit debt has increased 315 percent over the same period of time. Finally, mortgage debt has increased 294 percent since 1990.
There have been articles questioning the effect that consumer credit may have on the economy since 2004. The bubble hasn't burst yet, but it's coming due. But how did we get here? Two rulings helped the credit card companies: 1978's Marquette National Bank v. First of Omaha Corp and 1996's Smiley v. Citibank.
In 1978, the Supreme Court ruled that credit card companies could charge interest rates based on the state laws where the companies were located. The laws where cardholders lived were circumvented. And guess what - the companies that issued the cards moved to Delaware and South Dakota and any other state willing to deregulate interest rates. Then, in 1996, the Supreme Court took it a step further and ruled that credit card companies could charge any fees that were allowable by the state law in which they were headquartered.
These two rulings completely deregulated the credit card industry and, when coupled with more stringent bankruptcy rules (implemented in 2005), are helping to usher in a new era of serfdom. Stay out of the pocket of the credit card companies or surrender as a virtual slave.
Going further back, we can see that total credit has increased 205 percent since 1990. Revolving credit debt has increased 315 percent over the same period of time. Finally, mortgage debt has increased 294 percent since 1990.
There have been articles questioning the effect that consumer credit may have on the economy since 2004. The bubble hasn't burst yet, but it's coming due. But how did we get here? Two rulings helped the credit card companies: 1978's Marquette National Bank v. First of Omaha Corp and 1996's Smiley v. Citibank.
In 1978, the Supreme Court ruled that credit card companies could charge interest rates based on the state laws where the companies were located. The laws where cardholders lived were circumvented. And guess what - the companies that issued the cards moved to Delaware and South Dakota and any other state willing to deregulate interest rates. Then, in 1996, the Supreme Court took it a step further and ruled that credit card companies could charge any fees that were allowable by the state law in which they were headquartered.
These two rulings completely deregulated the credit card industry and, when coupled with more stringent bankruptcy rules (implemented in 2005), are helping to usher in a new era of serfdom. Stay out of the pocket of the credit card companies or surrender as a virtual slave.
Thursday, June 14, 2007
The beginning...
Welcome to my blog!
As I start this blog, general market conditions look bleak.
The housing market is in tatters; and still, people keep yammering about a rebound. It's not coming anytime soon. Interest rates have been rising constantly over the past few weeks, which means more loan defaults and an even greater supply of housing on the market. AND, a rise in interest rates means less people will be eligible for mortgages; thus, less houses will sell.
The stock market keeps making gains; Dow Jones record highs are a weekly event. I'm anticipating a market top in July. I like the week of the ninth as a target date. This year, the Fourth of July falls smack dab in the middle of the week; I don't believe that investors will shake their bullish attitude until after the holiday. I'm somewhat amazed that the market hasn't tanked sooner, especially with all the recent bad news. It's a perfect example of psychological factors trumping fundamentals; it's like faith trumping reasoning. Soon enough there will be a price to pay. Get out now while you still can.
Gold has been up and down this year. Hovering around $600 at the beginning of the year, the price of gold shot up to $690 around the middle of April. Currently, the price is $651.60.
Chart: http://www.thebulliondesk.com/
Looking at the five year chart reveals a distinct upward trend. At this point in time, I'd recommend buying gold due to the lull in price; it makes for a perfect jump in point. I expect that the price of gold will continue to rise through at least the end of the year.
Oil has been a bit volatile since the beginning of the year. OnJanuary 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.
The long term will inevitably create upward pressure. There is a finite amount of oil in the world; because of it’s relative scarcity, it makes for a great economic topic. In 2007, theUnited States
Oil has been a bit volatile since the beginning of the year. On
The long term will inevitably create upward pressure. There is a finite amount of oil in the world; because of it’s relative scarcity, it makes for a great economic topic. In 2007, the
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