The Market Analyst

Market Notes and Links of Interest

2007-11-12T14:13:00.000-08:00

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

2007-11-08T16:57:00.000-08:00

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

2007-11-06T18:07:00.000-08:00

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

2007-10-29T20:39:00.000-07:00

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...

2007-10-19T14:40:00.000-07:00

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...

2007-10-16T21:55:00.000-07:00

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

2007-10-01T19:23:00.000-07:00

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?

2007-09-28T20:20:00.000-07:00

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

2007-09-27T18:11:00.000-07:00

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

2007-09-26T18:45:00.000-07:00

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

Halo 3: Beating Goals, Breaking Records

2007-09-26T18:33:00.000-07:00

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

2007-09-25T15:36:00.000-07:00

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.

2007-09-24T17:20:00.000-07:00

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?

2007-09-24T16:37:00.000-07:00

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

2007-09-24T16:35:00.000-07:00

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)

2007-09-24T16:33:00.000-07:00

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?

2007-09-23T15:23:00.000-07:00

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...

2007-09-22T18:05:00.000-07:00

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

2007-09-22T17:40:00.000-07:00

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?

2007-09-07T18:49:00.000-07:00

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)

2007-09-07T18:28:00.000-07:00

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...

2007-09-06T12:30:00.000-07:00

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?

2007-09-03T19:40:00.000-07:00

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...

2007-08-23T14:31:00.000-07:00

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

2007-08-14T15:59:00.001-07:00

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

2007-08-03T13:34:00.000-07:00

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

2007-08-01T18:14:00.000-07:00

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

2007-08-01T11:17:00.000-07:00

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

2007-07-31T22:28:00.000-07:00

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

2007-07-30T18:23:00.000-07:00

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??

2007-07-29T20:51:00.000-07:00

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

2007-07-29T19:42:00.000-07:00

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

2007-07-29T19:38:00.000-07:00

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

2007-07-27T20:20:00.000-07:00

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

2007-07-27T14:49:00.000-07:00

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

2007-07-26T23:13:00.000-07:00

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

2007-07-26T17:55:00.000-07:00

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

2007-07-26T12:22:00.000-07:00

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!

2007-07-25T20:48:00.000-07:00

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"

2007-07-25T17:44:00.000-07:00

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

2007-07-25T13:16:00.000-07:00

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

2007-07-24T23:49:00.000-07:00

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

2007-07-24T16:44:00.000-07:00

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

2007-07-24T00:11:00.000-07:00

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?

2007-07-23T20:15:00.000-07:00

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.

More Metal ETFs and Indexes

2007-07-23T15:41:00.000-07:00

Gold and other metals are poised to rise. Here's a few more recommendations for cashing in:

XAU: "The XAU is an index traded on the Philadelphia exchange. It consists of 11 precious metal mining companies."

HUI: "The AMEX Gold BUGS(Basket of Unhedged Gold Stocks)Index represents a portfolio of 14 major gold mining companies.The Index is designed to give investors significant exposure to near term movements in gold prices."

GDX: "Global Markets Vectors tracks the Amex Gold Miners Index, which includes a total of 37 large-, mid- and small-cap U.S. stocks and ADRs. It is heavily weighted with two Canadian firms, Barrick Gold at 14.45% of assets and Goldcorp at 9.45%, followed by Newmont Mining at 9.51%."

As the dollar continues to weaken and adjustable mortgage rates continue to reset (leading to more bad mortgage-backed securities), gold and other metals will continue to rise. And because mortgage-backed securities are illiquid, the bull market should be slow, long, and drawn out. Over time, a bubble could develop.

XAU ended trading at $158.26; HUI ended trading at $368.93; GDX ended trading at $42.99.

Sirius/XM Plan Gets Overhauled

2007-07-23T14:33:00.000-07:00

In another attempt to attract the blessing of the FCC, satellite radio companies Sirius and XM have announced a new plan:

"'Our definition of the public interest,' Karmazin explained, 'is that [the merger] will result in more choice and lower prices for consumers.'"

The pricing plans announced Monday range from $6.99 per month for 50 channels from either Sirius or XM, to a $16.99 per month subscription, which would allow customers to keep their existing service and cherry-pick channels from the other provider's service.

For me, I'd be able to get the music channels I want and then add Howard Stern and the NFL. If I don't want to pay for the Martha Stewart channel, I don't have to. If I don't want to pay for the NHL or MLB channels, I don't have to. If I don't want twenty different rock channels, I don't necessarily have to pay for them all. How would this arrangement harm the consumer? The only problem would be the possibility that the existing customers would have to buy new radios:

"To subscribe to the “à la carte” plans, consumers would have to buy new radios."

I was under the impression that previously, this was one of the concerns of the FCC. And that could pose problems. I only paid $25 for my radio. I'd be happy to buy a new one; the lowered cost of my subscription plan would more than pay for it over a few months. Others have paid considerably more and that's where the problems would arise. As I said previously, I seriously doubt the merger will happen. But I have hope.

The Case for Ron Paul: Part One and Two

2007-07-23T01:50:00.000-07:00

I think it’s important for us to examine where our true priorities are. The first thing I’d like to say is that, unless unusual circumstances come to pass, I’ll be voting for whoever the Democratic candidate is. That being said, I’d like to examine what the election in 2008 should ultimately be about.

The election in 08 is about the Iraq war. That’s been the biggest issue separating our Democratic leadership in the senate from the Republican leadership. While we’ve been fighting to redeploy our troops to Afghanistan and other more urgent areas, our Republican counterparts have been filibustering to protect their president and his Iraq war policies. Since we’ve held the congressional majority, we’ve been unable to pass meaningful legislation that would do so. Obviously, we need to get out of Iraq.

The election in 08 is about the Patriot Act. Since 9/11, the Patriot Act is the single most damaging piece of legislation to our nation. The Patriot Act is responsible for the telephone wiretaps, and the expanded ability of the Feds to conduct searches. The Patriot Act is responsible for stripping the people of the right of habeas corpus. The Patriot Act is the legislation that gives the government the right to access our library records (if you’re lucky enough to have a library). The Patriot Act is the law that allows increased monitoring of our internet ‘clicks’. And of course, the Patriot act allows for secret searches and searches without a warrant. But most importantly, the Patriot Act EXPANDS PRESIDENTIAL POWER.

If you’ve had the courage to read this thus far, then let me explain why I feel the way I do. There are four democratic presidential nominees who have voted in favor of the Iraq War, as well as the Patriot Act. These are individuals who should be admonished within our party. Biden, Clinton, Dodd, and Edwards all voted for the Patriot Act, as well as the authorization for force in Iraq.

The problem I have with these four candidates is that they didn’t have the conviction to turn down these laws. Either they were afraid of losing elections or they believed that the executive branch should have the authorities that these laws allowed for. So what happens when they become president? Does this mean that Hillary will fight to keep the powers that she voted to instill the president with? If you are afraid of 'big brother', would you be equally afraid of 'big sister'? Why should we trust Edwards or Biden or Dodd now? Since they're running for president, don't they have something to gain? Should we allow them to pander to us now when they wouldn't stand up for our beliefs four years ago? We have candidates in our own party running from president who have voted to EXPAND PRESIDENTIAL POWER. Am I the only one who sees a conflict of interest? This is a serious problem. We need a president who has exhibited the foresight to say “NO”. Imagine if we had a candidate in either party who was bold enough to say “NO” to his own party? A candidate who has never voted to EXPAND PRESIDENTIAL POWER…Would you vote for him if he were running for president?

Blindly following party lines is exactly the problem that has kept us from redeploying our troops out of Iraq. So why should we, as progressives, exhibit the same characteristics? Partisanship is the problem. Voting for the candidate based on party affiliation rather than qualifications and voting records is a serious blight on our democratic society.

Ron Paul is the antithesis of our current president; he’s further from the president and the Republican Party than some of our own candidates. Labels should mean nothing in this election. Issues should be paramount. That’s why I’ve been advocating for Ron Paul. He’s a serious long shot to win his party’s nomination, but if the unusual were to happen I would have to seriously consider his candidacy. Were he to run against certain Dem candidates, I wouldn’t think twice. I’m sick and tired of expanding presidential power and the war in Iraq to the point where I could be blinded to all other views. Labels are nothing; issues are everything.

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Part Two:

I realize he has his shortfalls. But you must remember a few things:

(1) We're all but assured of having solid majorities in both houses of congress. If the war in Iraq persists through the 2008 election, it's guaranteed. Furthermore, we would have a president in the White House who believes that there are THREE equal branches of government. What you're thinking is that we'll have another Bush Republican in the White House issuing signing statements and claiming unrealistic executive privilege at every turn. If you examine Paul's record, you'll see extreme consistency. If Paul were president, we would be OUT OF IRAQ and there would be NO PATRIOT ACT.
Thus, if we had a stronghold on the congressional branch, we'd have a serious check on the White House.

(2) If Hillary is being truthful in her speeches, as president she'd keep residual forces in Iraq. If her voting record is truthful, she'd claim the same authorities as president that Bushie has. Why wouldn't she?

(3) Ron Paul is a firm believer in state's rights. When you transfer rights from the federal government to the state government you have a much purer form of democracy. Your vote means more at the state level than it does at the federal level, no? If we're not paying federal taxes, does that mean we don't have to pay state taxes? Does that mean we don't have to increase state taxes? Does that mean we won't have more money for state taxes?

(4) Number four ties into number three. Ron Paul is in favor of abolishing the Federal Reserve and returning to a gold standard. What that means is that our dollars would have intrinsic value. Each dollar would be worth a certain amount of gold. As our current system stands, our federal government is essentially a counterfeiter. Whenever it feels like expanding the money supply, it can. All it has to do is keep interest rates low and print more money. What happens when the money supply expands? It causes inflation. Inflation isn't a problem for those who are rich, and when I say rich, I mean top five percent income level. For the rest of us, it causes our money to become less valuable. At the same time, we have no hedge because we have a limited amount of dollars.

Recently, the stock market hit the 14,000 milestone. Have you wondered why that happened despite an ailing housing market, a massive credit bubble, and rising food and energy costs? It's because the FED has the ability to expand the money supply. That money has to go somewhere; thus, it enters the financial markets. Money entering the financial market will create upward pressure on prices (inflation), despite the fact that the fundamentals are poor. It's simple supply and demand. The money has to go somewhere. People will refute this argument by saying that quarterly profits are up, but the quarterly profits are only up among business to business transactions. Look at retail numbers (besides Walmart, where everyone will start to shop when they're poor). They're down. Way down.

So when I hear people talk about Ron Paul's bathtub being smaller than Grover's, I laugh. It's a view that's too simplistic and it's a view that buys into the corporate mindset.

Extremist views? Yes. Isn't that what America needs? Aren't we too complacent with the status quo?

Finally, I'd like to discuss the last reservation I have, which wasn't addressed in my diary, nor in the comments. That is, that his Supreme Court nominees will be conservatives. The views I just laid out before you, were they really conservative views? I realize he has a problem with homosexuals and I realize he might hold some prejudices. But do you really think that a man as honest as him, a man who respects ALL THREE branches of government, do you really think he'll nominate more Bushie candidates? Or do you think he'll nominate individuals who deserve to serve on the highest of courts? If you think otherwise, then please let's see some proof. Prove it with his voting record. Prove it with his public statements. If you can't do so, then you're just as partisan as the people you oppose.

I'm always willing to change my mind. All I want is evidence.

Jim Cramer Finally Gets the Memo

2007-07-22T21:20:00.000-07:00

Mad money or just plain madness? Jim Cramer finally got the memo. I issued a couple memos a month ago. Had you sold/shorted when I told you to, you'd already be enjoying the following profits:

Beazer Homes: 31%
Lennar Homes: 19%
KB Homes: 17%
D.R. Horton: 9%
Standard Pacific Homes: 3%

Flash Memory Shortage?

2007-07-22T20:15:00.000-07:00

Last Thursday I ran across some interesting news that could have good implications for savvy investors. It seems that the Apple iPhone and iPod accounts for a significant amount of NAND flash storage production:

"Apple's new red-hot iPhone and the company's line of iPod media players are expected to use a much as 25 percent of the world's NAND flash memory production in the current quarter of this year, according to new data from research firm DRAMexchange."

This news bodes well for manufacturers of flash memory chips. Producers of NAND memory include Micron (MU), STMicroelectronics (STM), and SanDisk (SNDK). These stocks are all on my watch list. I'll let you know if/when I think they could be a good buy. For now, the risk is too high.

Weekend Video - iTulip Rocks Edition

2007-07-21T20:17:00.000-07:00

Three videos from the iTulip website. I wanted to call this the 'Zombie Financial Media Edition', but there are only two videos of that theme. So I decided to name it the 'iTulip Rocks Edition'. Thank god we have them around to tell it like it is! Leading it off is a commercial with Gary Coleman pushing loans. I actually saw it on cable at the beginning of the week in full. I noticed the 99.25 percent and sat for a minute. Forty-two payments of $216.55 is $9095.10...for a $2600 loan. And then I saw it on iTulip which forced me to put it up here. It's a symbol of the fact that financial education is more important than ANY other. Gary Coleman: King of Shame.

Gary Coleman Pushing Loans for Cash Call:

Zombie Financial Media: Fair Taxation on Wall Street:

Zombie Financial Media: Reporting on Subprime Fiasco

Jumping Ship on US Stocks

2007-07-19T20:15:00.000-07:00

I'm jumping ship on some stock recommendations I've listed as "buys". This includes:

(1) AMN Healthcare - Stock symbol AHS
-Recommended on 6/25 at a price of $22.41
-Closed trading on 7/19 at a price of $21.48
-Net Loss of 4.14%

(2) Cross Country Health Care - Stock symbol CCRN
-Recommended on 6/25 at a price of $16.85
-Closed trading on 7/19 at a price of $17.26
-Net Gain of 2.43%

(3) Intel - Stock symbol INTC
-Recommended on 7/14 at a price of $25.97
-Closed trading on 7/19 at a price of $25.26
-Net Loss of 2.73%

(4) Hewlett Packard - Stock symbol HPQ
-Recommended on 7/14 at a price of $47.25
-Closed trading on 7/19 at a price of $48.40
-Net Gain of 2.43%

I'm keeping all metal ETFs, mining stocks, foreign ETFs, and GE for their alternative energy holdings. Also, I'm keeping sells on the banking and homebuilder stocks I've previously indicated. I'll be recommending more foreign ETFs and metal funds later this evening or tomorrow.

Why the change? I'll give you four reasons: here, here, here, and here. The fourth reason might be the most important. From the Market Oracle:

When this game is over and the music stops there will not be chairs for all players. There will be some winners and many losers. We believe the winners will be those investors that have aligned themselves to the natural resource sector and the many different ways to invest therein.

I don't quote the Market Oracle very often; in fact, this might be the first time. The reason? I seem to always agree with their positions. Two weeks ago, the Oracle had an article stating that the downside risk outweighed the potential gains in US stocks. Had I heeded their warnings, I wouldn't have lost face with Google. Although I gained a few percent with HP and Cross Country, I lost plenty more.

In addition, the Bloomberg stock option report also weighs heavily in my mind. If people are betting against the market at a two to one ratio, then the optimism has turned to pessimism. Consider the options report to be an investor confidence index that's turned south.

Therefore, I'm reducing my exposure to US stocks. The risk just isn't worth it.

Google Misses - Market to Drop Tomorrow

2007-07-19T14:03:00.000-07:00

Look for a stock decline in trading tomorrow. It's almost guaranteed now that Google has missed analysts expectations for the second quarter:

"The Mountain View, Calif., Net giant made $3.56 a share on a non-GAAP basis. Net revenue, excluding the money Google shares with its advertising partners, was $2.72 billion."

"Analysts surveyed by Thomson Financial were looking for a $3.59-a-share profit on net revenue of $2.68 billion."

So there you have it. Revenue was up, profit was down. Google needs to retain that level of revenue while wrangling in costs. I expect Wall Street to overreact as they have in the past:

Indeed, bulls might well note that previous profit disappointments have provided good buying opportunities. When Google last missed a quarter back in January 2006, shares tumbled into the $370s in a 15% after-hours selloff.

I have learned a valuable lesson and hopefully, by observing me, you have too. Flip flopping on stocks (the way I did on Google) is generally not a good idea.

This should lead to a precipitous drop tomorrow among all stocks, or even act as a catalyst in bringing about the market correction. I haven't decided if I should close the recommendation or persist. I'll update this post later today with a recommendation on Google.

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Update 7/19/07 7:28 PM: Last I checked, Google was down seven percent in after hours trading. Since there are plenty of investors who don't have access to after hour trading networks, I think the stock will decline further tomorrow. Sell at the opening bell. To be fair, I will close my recommendation at the price that the stock opens with tomorrow.

Update 7/20/07 7:08 PM: Google opened at $511.90.

Fixing the Bond Market

2007-07-18T16:40:00.000-07:00

When you don't like what you hear from one doctor, you get a second opinion. But how ethical is it to get a second opinion when you're talking about rating the creditworthiness of mortgage-backed securities? From Bloomberg:

"Moody's Investors Service has been excluded from rating 70 percent of new commercial mortgage-backed securities after toughening its guidelines. "

"'There's no doubt in my mind that it's because of the change' said Philipp, who included a chapter titled 'Rating Shopping is Alive and Well' in a report released today. 'Normally, we'd rate 75 percent of the issues, not 30 percent. I guess this is sort of like, no good deed goes unpunished.'''

Investors beware. You can put makeup on a pig, but it'll still be a pig.

Dow Drop Turns Into a Hiccup

2007-07-18T14:25:00.000-07:00

The Dow dropped as much as a percent in early trading, before rebounding for a 0.38 percent loss. Over the last few weeks, we've had one trading day in which the market recedes from a subprime scare. In the previous weeks, the market has rebounded the following days. Last week, the market rebounded to post record highs. Will this week be the same? If the last half of the trading day is any indication, it could be.

One thing about trading today that made me scratch my head, is the minimal hit taken by Bear Stearns. If you'll recall yesterday, the company announced what the two troubled hedge funds were really worth: Zero, Point, Zero! Okay, actually one of the two funds is still worth nine cents on the dollar. But Bear Stearns didn't take the hit today. They lost less than half a percent. Goldman Sachs and JPMorgan, on the other hand, both lost two percent of their value; Citicorp lost one and a half percent; Merrill Lynch lost 3.25 percent.

The next two days should be telling as to what direction the market will turn. Will this be another hiccup, or the start of a correction period?

A Pure Play on the Brazilian Economy

2007-07-17T21:23:00.000-07:00

After perusing The Street, I came across an article written by Jonas Elmerraji which discussed ETF investing in South America, as well as Latin America. In the piece, Jonas suggests an ETF tied directly to the Bovespa stock exchange in Sao Paolo, Brazil:

"The ETF mirrors the MSCI Brazil Indes, an index that was designed to measure Brazil's domestic market equity performance. What that means is that EWZ essentially tracks the performance of the hundreds of Brazilian companies that trade on the São Paulo Stock Exchange."

"The ETF is heavily weighted in Brazil's key economic areas -- materials...and energy...as well as quickly emerging service areas, such as financials."

I think the Brazilian ETF, EWZ, is a splendid pick. The fund has gained 88 percent since a year ago. This fact certainly doesn't take away from the fact that the economy is still growing at a breakneck pace; in fact I think it will continue to do so. Jonas explains:

"Brazil has the most powerful economy in Latin America. The country manufactures everything from sophisticated turbine aircraft to orange juice, and it has a well-established professional services sector."

"Of the four BRIC (Brazil, Russia, India, China) countries, Brazil arguably has the most developed economy."

Mr. Elmerraji also notes that Brazil's infrastructure is superior to the other BRIC countries. So if Brazil has the lead in infrastructure and is the most developed economy of the four, why hasn't it seen the kind of growth that the Chinese stock markets has seen over the past five or so years? I think the economy, as well as the Sao Paulo stock market, has a ways to go before its growth slows down; thus my recommendation of the EWZ. The fund closed trading on July 17, 2007 at $68.22.

Bear Stearns: WORTHLESS

2007-07-17T19:30:00.000-07:00

It's being reported tonight that the riskier of the two Bear Stearns hedge funds is as good as worthless, while the other troubled fund is worth about NINE CENTS on the dollar. From the NY Times:

“'The preliminary estimates show there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for the investors in the High-Grade Fund as of June 30, 2007,' according to the letter."

In a related story, Bloomberg reports that Goldman Sachs and JPMorgan are among a few bank who are unable to dump their debt:

"'The private equity firms, being very tough negotiators, are unlikely to let the banks off the hook,' said Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York. 'They'll say that's your problem and that's why we're paying you: To take risk.'''

"'Those bonds are probably worth 94 cents on the dollar, or $43.5 million less than when they were sold on June 28', according to Justin Monteith, an analyst at high-yield research firm KDP Investment Advisors in Montpelier, Vermont."

I have a feeling that the faulty debt problems will be mostly contained within the banking industry. I can't see this affecting tech stocks very much, if at all. As for gold, these developments will only cause upward pressure on metal and metal stocks, especially if it gets bad enough for a federal bailout.

Investment banks beware. When the chickens come home to roost, the cock-fights will get bloody. Did you follow my advice? What about this? Are you covered?

(Edited 7/17/07 7:57 PM: edited to fix the NY Times link)

CNBC Double-Speak

2007-07-17T17:57:00.000-07:00

Consider the following two headlines:

(1) Market Milestone: Pros Say Stock Rally Isn't Over

(2) Options Report: Investors Expect More Volatility in Market

Both headlines appeared on the CNBC website today; one is the antithesis of the other. So why is CNBC talking out of both sides of their mouth? Fair and balanced financial news? Are the waters in the stock market truly this murky?

Bull market's seem to last longer than the fundamentals would allow for. That is, in essence, the psychological influence on financial markets. With tech earnings up, the bull market could last for a few more weeks, or even a couple more months. However, the further it goes beyond the fundamentals, the harder the correction will be.

The options report says that people are buying twice as many put options as they are of call options. Put options allow you to sell stocks at a certain price, while call options allow you to buy stocks at a certain price.

I think CNBC is covering their a$$es. Talk out of both sides of your mouth and you can be right at least part of the time.

Here's a related post regarding the options report, first reported by Bloomberg.com.

Housing Market - No Bottom in Sight!

2007-07-17T13:38:00.000-07:00

The homebuilder confidence index fell even further this month. From the NAHB:

"A surplus of unsold homes on the market, combined with ongoing concerns in the subprime mortgage arena and affordability issues associated with tightened lending standards and higher interest rates, continues to take a significant toll on builder confidence, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The HMI declined four points to 24 this month, which is its lowest level since January of 1991."

(An index level of 50 indicates that half of those polled have a favorable view.) The article continues with the claim that house sales should increase later this year, with a continued rebound into the start of next year. I say they're crazy. We've yet to see the spike in mortgage rate resets, which will increase the already high default rate. This, in turn, will flood an already bloated level of supply. Plus, lending restrictions are tightening and will continue to do so, stifling demand. And what happens when the Fed finally decides to take care of the inflation problem? Interest rates will increase, further dampening the demand for homes.

Today's report from the NAHB looks frighteningly similar to last months index. I see a continuing trend. Homebuilders should look forward to 2009. That's their best bet.

Kooky Kucinich, Cold Clinton, and Activist Al

2007-07-17T12:29:00.000-07:00

Forbes.com recently published a few articles ranking presidential candidates based on Kookiness, Coldness, and Activism. The results were, as the title indicates, very predictable. What's interesting is the buzz being generated by Democratic presidential candidates. The number one position in each poll was held by a Democrat.

From Forbes:

"The top six slots in this category (activists) are all held by Democrats. Former New York Mayor Rudy Giuliani claims the honor of most activist Republican but is seventh overall."

The top six activist slots are held by Dems...Wow! In order after Gore comes Clinton, Obama, Kucinich, Edwards, and Richardson. At the bottom of the list is Fred Thompson (surprise surprise). But what do you expect from a failed senator turned actor?

At the top of the coldest list is Clinton. Newt Gingrich (who isn't really running), clocked in as the coldest Republican, followed by Romney. The bottom of the cold list should come as no surprise; the bottom two democratic candidates in terms of coldness are Obama and Richardson. The article draws parallels between low coldness and high appeal, which could indicate that Clinton's polling numbers are inflated. Fred Thompson and Rudy Giuliani are the least cold Republicans (and they have high appeal).

In terms of the most kooky-wacky, Kucinich wins in a land slide. (Is he running for president of the US or president of Middle earth??) What I find surprising is that Al Gore came in second, followed by Clinton and then Republican McCain. The way McCain's been acting recently, I'd have pegged him second or third. In my opinion Al Gore should be at the bottom of the list. Instead, Fred Thompson and Mike Bloomberg hold the bottom spots.

Does this mean that activism equals kooky-wacky?

Bloomberg.com: Put Options Indicate Pullback

2007-07-16T19:13:00.000-07:00

According to stock option data compiled by the Bloomberg news service, the market could see a correction of between five and ten percent:

"Bets in the options market against the Standard & Poor's 500 Index have exceeded wagers it will rise by a 2-to-1 margin for a month, the longest since Bloomberg began compiling the data in 1995."

"That's seen as a warning sign the market is due for a decline of 5 to 10 percent after the S&P 500 rose to two records last week, say managers of almost $1 trillion at Morgan Stanley Global Wealth Management, National City Private Client Group and Russell Investment Group."

At current levels, a ten percent decline would knock the Dow down to around 12,555, while the S&P 500 would be at 1,394. It's certainly nothing devastating and it's definitely due. The current bull market has been one of the longest in history without a correction, thanks in part to the Federal Reserve pumping liquidity into the economy nonstop since the dot.com bust. Now, ten percent would be easy to swallow, but that's assuming it's only ten percent:

"The Leuthold Group, whose flagship fund has beaten 99 percent of similar funds over the last five years, expects the S&P 500 to slide as much as 19 percent by the end of the year."

Okay, now we're venturing into uncomfortable territory. A 19 percent pullback would leave the Dow at 11,300 and the S&P 1,255. These numbers would be a bit tougher to handle. Investor dollars would fly out of the country and unemployment rates would soar. Consumers, already hurting from the deflating housing market and the increasing gas costs, would spend even less. I think the sector with the most to lose is retail. I briefly mentioned the problems they're experiencing last week:

"Another sector that could feel the hurt is retail. Fewer homeowners refinancing mean less being spent at home depot or at the mall. We've already seen home depot's hurt. Bed Bath and Beyond has also lowered it's expectations in the last few weeks. The housing downturn might be blamed as the number one reason, but subprime is not far behind. And as the noose tightens around lending standards, the infusion of cash that has helped fuel earnings in retail will evaporate."

It's the housing market, and the tighter lending restrictions, and the rising food costs, and the rising energy costs. Individually they're containable; collectively they could do some damage.

Black Gold - Are You Profiting?

2007-07-16T14:29:00.000-07:00

The price of oil has been riding high the last few weeks. And it could go higher:

"Crude oil prices soared to 11-month highs Friday on a new forecast that global oil demand will accelerate next year as supply remains tight."

"'My line right now is that we're headed to triple-digit oil prices within three or four years and the first digit is not going to be a 1,' said Philip Verleger, an economist who heads energy consultancy PK Verleger LLC."

"He cited 'huge' pent-up demand in China and the rest of Asia, lack of growth in production capacity and reduced investment in refineries amid local resistance to new sites, and worries about measures to fight global warming."

Since my recommendation one month ago, oil has increased by 9.5 percent. On June 14th, oil was trading at $67.69. Although historically high, if Philip Verleger is correct a $68 barrel of oil will look mighty cheap. And it's not just a lack of supply or an increase in demand; it's both. From Forbes:

"Scheduled summer North Sea maintenance lent support, while the unexpected closure of the Central Area Transmission System (CATS) stoked supply jitters. J-Block, a group of oilfields in the region, has been unable to produce oil or gas since July 1, when CATS was closed."

Maintenance issues are strangling supply, while increased growth in emerging economies such as Chindia are accelerating demand. I don't anticipate the price to subside any time soon. Hold onto your oil funds!

Solar Overvalued

2007-07-16T13:45:00.000-07:00

Last week, I reported on the possible over valuation of solar energy stocks. First Solar (FSLR) was trading at 491 times earnings, while SunPower (SPWR) was trading at 182 times earnings. Quite inflated! In today's New York Times, comes a solar story with more evidence that the psychology of solar is trumping fundamentals:

"The trade association for the nuclear power industry recently asked 1,000 Americans what energy source they thought would be used most for generating electricity in 15 years. The top choice? Not nuclear plants, or coal or natural gas. The winner was the sun, cited by 27 percent of those polled."

"...some of the most ardent experts and investors say that moving this energy source from niche to mainstream — last year it provided less than 0.01 percent of the country’s electricity supply — is unlikely without significant technological breakthroughs. And given the current scale of research in private and government laboratories, that is not expected to happen anytime soon."

Even by the year 2030, the government expects solar energy to account for a tenth of a percent. Of course, plenty can change over that period, but the fact that most experts are pessimistic should hold plenty of weight.

The only question now is when will we see the correction in stock prices?

Chris Bancroft - Our Last Hope

2007-07-15T22:04:00.000-07:00

Reuters is reporting that Chris Bancroft is trying his hardest to block the proposed takeover of Dow Jones by News Corp:

Christopher Bancroft has recently approached hedge funds, private equity firms and General Electric Co. , hoping to buy enough voting shares of Dow Jones to give him the power to thwart a sale, the paper reported on its Web site, citing people familiar with the matter.

Imagine if Rupert Murdoch controlled the Wall Street Journal. Oh sure, the Bancroft family has been negotiating to retain editorial control of the newspaper, but so did the Times newspaper of London. A lot of good that did. It doesn't matter what is negotiated. If Murdoch gets his hands on the WSJ, it will start to look more like the New York Post. Yuk!
In my opinion, Murdoch only wants the WSJ as another platform to challenge the NY Times. I can't find the story online, but I remember there being a piece in which Murdoch states that he wants more NY media so that he's better equipped to shout down the NY Times. The NY Times reports the facts and sometimes those facts don't jive with the reality uber-conservatives such as Murdoch would like there to be.
Murdoch would turn the Journal into a complete joke. As it is, every story should be taken with a grain of salt. Imagine the inaccuracies if Murdoch has his way.
If you don't believe me, check this out. I can't get through the movie without yelling at the screen. Dow Jones needs to say no to Murdoch or the business community needs to find another buyer, either collectively or individually. Where's George Soros when you need him?

Weekend Video - Knockout! Edition

2007-07-14T16:20:00.000-07:00

ESPN's Friday Night Fight from June 29th was one of the best bouts I've seen in a long time. I tivo'd it on my computer and have watched it a few times now. I doubt I'll ever delete it. Who says you have to spend $60 on PPV for a great fight? The knockout leads off this week's weekend videos.

Darnell 'Ding-a-ling' Wilson Crushes Emmanuel Nwodo:

'Pretty Boy' Floyd Mayweather beats down Ndou:

Roy Jones Jr: "Look Mom, No Hands":

GE Ditches Subprime Sector (and Other Reasons to Buy)

2007-07-14T14:39:00.000-07:00

It was recently announced that General Electric is in the process of getting out of the subprime mortgage industry:

"The Fairfield, Conn.-based company...announced it is exiting the U.S. subprime-mortgage business, and that it has already sold off $3.7 billion in loans to reduce its exposure to turmoil in that market."

"In the first quarter, GE laid off more than 460 WMC Mortgage employees and took a $500 million charge when it sold off part of its residential subprime assets. On Tuesday, Moody's Investors Service downgraded 399 subprime securities, including home loans originated from WMC Mortgage."

As the subprime mortgage industry continues to crumble, the smart players are positioning themselves for protection. That's precisely what GE has been doing. The company also reported a ten percent increase in profit for the second quarter:

"General Electric Co. shares notched a five-year high Friday after the conglomerate reported a 10% increase in second-quarter earnings, due in part to strong revenue growth in its infrastructure businesses, including aviation- and energy-equipment sales."

I want to focus on their energy-equipment sales. In his book, The Coming Economic Collapse, Stephen Leeb takes a few pages to discuss General Electric's alternative energy ventures. Leeb describes GE as being a leader in the area of wind:

"General Electric is the world's largest integrated wind company and the second-largest maker of wind equipment. Over the past three years, wind revenues, admittedly starting from a small base, have grown by 50 percent a year. [The edition I have was published in 2006.] The Street projects the percentage growth from this division will be in the low 20s over the next five years. We think it could easily exceed 30 or even 35 percent."

Leeb also touches on the fact that energy-related products and services make up 12 percent of revenue (in 2006). A quick glance at GE's most recent earnings report indicates that orders for energy related equipment increased by 72 percent in the second quarter of 2007. Furthermore, revenues from their energy business increased by 17 percent, while total profit in the energy business increased by thirty percent. Those are strong increases that should continue, even despite a possible market downturn. That's why I recommend buying GE. The company closed trading on Friday at $39.50.

Tech Talk - Intel and HP

2007-07-14T13:40:00.000-07:00

Upon reviewing Jon Markman's recent MSN article, I think Intel could be a good stock pick:

"A Cowen & Co. study found that two-thirds of large businesses and three-quarters of small businesses plan make the switch to Vista over the next 12 months after Microsoft publishes its first Service Pack...Most plan to implement Vista via new computers, not by upgrading existing machines -- leading to a surge in demand for the Intel chips that serve as their brains."

I've been tracking Intel's stock price since late last year. From last November through March of this year, the price languished at around twenty dollars. It quietly crept up to $22 in May and $24 in June. It closed trading at $25.97 on Friday. There's no reason why it shouldn't get another boost, especially if other tech stocks report earnings comparative to analysts' expectations. And that's in addition to the idea that more companies plan on switching to the Vista operating system.

Markman also offers some PC makers who stand to benefit from the Vista switch: Dell, Apple, and Sony. I'm shying away from these companies for now. One computer maker I do like is Hewlett-Packard. HP was mentioned in a recent Marketwatch article:

"'They've stabilized management, reduced costs and streamlined operations,' Scott said. 'They're more of a classic growth play now with a good sustainable upside going forward.'"

"'Their strategy is to continue to bring new products to market that successfully shifts their focus back to retail distribution,' Scott said. 'They've forced Dell, which had been concentrating on direct sales models, to enter the retail channel. It shows that they've been able to move the battle for new customers into HP's sweet spot.'"

HP closed trading on Friday at $47.25.

Changing Course

2007-07-14T12:20:00.000-07:00

As new information comes to light, I am forced to make adjustments to my portfolio. As much as I hate admitting being wrong, to do so is to learn and to grow. I was wrong on a few assumptions.

1. Merrill Lynch. Despite the fact that I think the subprime mortgage market is in huge trouble, I can't overlook this:

"Despite problems brokerage firms reported last month with the subprime mortgage business, analysts are more sanguine about results for Merrill Lynch, and they expect the firm to post a more than 20% rise from year-ago earnings per share."

You cannot ignore news items such as these. If you'll recall, Merrill took a very activist approach when it came to getting rid of subprime securities. While JP Morgan Chase was canceling auctions over fears that the entire subprime CDO market would be recognized for its true value, Merrill persisted. They rid themselves of highly risky debt obligations and by using an auction format, they were committed to doing so no matter the losses they'd incur. That, coupled with the news release, is my reason for changing course. If you shorted the company, buy enough stock to cover the short. If you sold your original stocks, too bad. I won't issue a buy for Merrill at this point because I think the banking industry is still due to take a large subprime hit.

2. Apple. The iPhone figures have yet to be released, yet the stock pushes upward. I'm not going to wait for it to hit $200 before I change course; I'm changing course now. Buy enough to cover any shorts and wait to see if the price comes down.

3. Google. This stock is the only one I'm reversing course on. From Marketwatch:

"Analysts polled by Thomson Financial expect Mountain View, Calif.-based Google to post a 44% gain in earnings from the period a year earlier, to $3.59 a share, while revenue is expected to grow 60% to $2.68 billion."

"Meanwhile, Cowen & Co. analyst Jim Friedland said in a note released Wednesday that he expects Google's share of its traditional search market only to grow ever-higher.

"'We believe Google will achieve a share of at least 90% of the search market over the next decade,' Friedland said."

If you shorted Google, cover your short. In addition, I recommend buying more shares. Google closed trading at the end of Friday at $552.16.

*************************************************************************************
Investing is about constantly re-examining your positions. Sometimes investment decisions are the wrong ones, while other times you'll be right on the money. For these three stock picks, I believe I made choices that were reckless, choices that were based on cursory research. I failed to use a proper amount of prudence. I shall try harder.

Irrational...Illogical?

2007-07-12T20:19:00.000-07:00

I'm confused. Are retail sales strong or weak? On the one hand, we have this:

"The Dow surged to a record on Thursday as Wal-Mart reported better sales, suggesting consumer spending is holding up despite rising oil costs and falling home prices."

"The encouraging retail figures and merger activity in the mining sector drove up the Dow up more than 1 percent to a lifetime record high of 13,828.48, and propped the Nasdaq to its highest in more than six years."

First of all, I think it shows complete ignorance to view WalMart's sales as some sort of retail bellwether. Although I agree that they've been a mega-strong player in retail, their sales are representative of the lowest prices in retail. That alone should be a reason NOT to give them much weight in terms of predicting the rest of the retail industry. Perhaps it's indicative of the fact that people cannot afford as much as they used to; thus, WalMart racks up more sales. But what happens when people decide against shopping at all other places because their prices are 'too high'? Then, we've placed all of our eggs in the WalMart basket and the rest of retail declines.
Secondly, I noticed this report:

"The big chain stores beat very low expectations in June, but total retail sales are expected to be anemic when the government reports its figures on Friday, economists said."

"'Consumption is looking anemic in the second quarter', said Leslie Preston, an economist for CIBC World Markets, in a note to clients."

Well, did we just place all of our eggs in the WalMart basket? I hope not (as I'm about to change course on a few items), but it does appear that the market was acting irrationally. To increase the way it did based on M&A activity and on a couple retail reports is ludicrous. I'm not a perma-bear, but I'd rather err on the side of caution in most cases, especially when the downside risk is so much higher than the possible returns. Tomorrow will be the day of reckoning. According to the economic calendar, retail sales are reported on Friday. Why all the hullabaloo prior?

Another reason why I'm bearish comes from an MSN Money article I've read in the last year. It comes from Michael Brush:

"Money managers chiefly put money in two assets: stocks and bonds. One way of deciding whether stocks are expensive is by comparing their performance to that of bonds. If bonds lag while stocks advance, according to some market watchers, fund managers will be more likely to sell stocks and buy bonds."

"To compare them, Goepfert contrasts the current ratio of the SPY to the TLT with the average ratio over the past three months. Since the ratio typically doesn't change much in 90 days, the two values should be about the same. Now, though, with the recent rally in stocks, there's a big gap. The current ratio has moved up to 1.58, compared with an average of 1.5 over the past 90 days. That may not sound like much. But since the ratio usually stays fairly constant in any 90-day period, this is a huge move compared with what normally happens."

That's a lot to quote, I admit, but dammit, it's important. The cost of owning stocks right now far surpasses the cost of owning bonds. Based on my personal projections, the 90-day averages go like this: the SPY is around 150.93 while the iShares Lehman Twenty Year fund is at about 85.70 for the three months ending 07/11/07. The SPY has increased by $7.53 while the TLT has decreased by $2.34. Currently, the ratio is at 1.76. The three month moving ratio for the three months prior to that is 1.60. So, either Michael is a goof and I followed the wrong advice, or he's right on and his prediction is way over due. Are stocks overpriced? I still can't tell, but I'm one day away from changing course on some ideas. Stay Tuned!

FED Releases Money Stock Stats

2007-07-12T14:20:00.000-07:00

The FED released June's money supply numbers this afternoon. M2 increased again, while M1 declined slightly. Retail money funds, which are a component of M2, have increased by six percent since the first of the year. Institutional money funds have increased by 10.5 percent over the same period of time. Ironically, the Dow has increased by 11 percent since the first, nearly identical to the increase in institutional funds.
Since we can't count on the FED to corral the money supply, we have to estimate where these funds will be allocated. Currently, a heavier proportion is being placed in the stock market; thus, the Dow broke another record today. It doesn't matter if all the stocks deserve their current pricing or not. If there are extra funds laying around, institutional investors will place them somewhere. They buy the stocks, increased demand causes upward price pressure, and viola: record breaking numbers.
What I've been betting on this whole time is that the funds will be moving from stocks to commodities. It's just a little hard to believe that despite all the bad news in the housing sector and the subprime mortgage market, coupled with the increasing trade deficit and federal deficit and the consumer deficit, the stock market continues its upward trend. When will it end?

Blowing Green Bubbles: Solar Skyrocketing

2007-07-11T14:50:00.000-07:00

MSN poses the question: could there be a green bubble brewing? I'd say so:

"Indeed, some green-fund managers now see the share prices of many companies tied to environmental sustainability as, well, unsustainable. 'Now you've got to worry about valuation and some of the speculative bubbles that are building,' Robinson says."

I fully agree that there are plenty of green stocks that are vastly overpriced. In particular, solar energy stocks have been on a tear:

"These funds have performed well, of course, because many of their growth-stock holdings have fared even better. Solar energy bellwether SunPower, for example, was up 158% in the past 12 months, as of July 9."

Sunpower (SPWR) is trading at 182 times earnings. That's definitely high, but it's not the best example. MSN failed to notice, or intentionally omitted that one. In my opinion, the best example of an overpriced company thus far is First Solar, Inc (FSLR). (Thanks to the individual who gave me the tip!) Forget being up 158 percent in the past twelve months. In just eight months, First Solar is up 364 percent. You read that right. The stock closed trading at $24.74 on November 17, 2006; it closed trading on July 10 at $114.89. The current P/E ratio is 491. That, my friends, is a classic example of a bubble.

Obviously, solar energy has a bright future. But does it warrant such overvaluation? Maybe yes, maybe no. The danger lies in the complete unpredictability of which direction it will go. I highly recommend watching the future trajectory, perhaps jumping into a short sell after it's observed to be heading down. It's way too volatile for me to assert a stance at this point.

The Silver ETF

2007-07-11T14:05:00.000-07:00

I recommend entering the silver market. As with gold, when paper currency floods the market, the price of precious metals goes up. Consider this argument from silverstockreport.com:

"Silver has been consumed by industry. The world is running out of silver; industry consumes more than the mines produce."

"There's no room for any investment demand to enter the silver market without driving the price sky high. We've just begun to see a little bit of investment demand."

"The current ratio of silver to gold is 50:1, 50 ounces of silver will buy 1 ounce of gold. The historic ratio is 15:1, that means you can make 3 times your money owning silver, but if we do better than the historic ratio, due to the scarcity factor, we could make 6-10 times as much money in silver than in gold."

Gold will make you money; silver could make you rich. The newly introduced silver ETF, iShares Silver Trust (SLV), is the easiest way to get in on the action. It closed trading today at $128.45.

S&P, Moody's to Downgrade Subprime Securities - World Stocks Falter

2007-07-10T19:03:00.000-07:00

Well, it's about time. How long has it been since we've known about the risks? Months and months. Finally, the two credit ratings organizations are coming around:

"Credit ratings on 612 classes of residential mortgage-backed securities backed by U.S. subprime collateral have been put on CreditWatch with negative implications, S&P said. Beginning in the next few days, the agency said most of these classes will be downgraded."

"That covers about $12.078 billion in rated securities, or 2.13% of the $565.3 billion in U.S. RMBS rated by S&P between the fourth quarter of 2005 and the fourth quarter of 2006, the agency noted."

Meanwhile, in a related story:

"Moody's cut ratings on 399 subprime residential mortgage-backed securities, or RMBS, and said that it may downgrade another 32 because of higher than expected delinquencies on the underlying home loans."

I don't know how many more securities there are that are at risk, but I would bet there are more. Any literate investor should have known for weeks of the great risk associated with subprime mortgage securities; the looming interest rate reset will be devastating. Here's the simple picture:

"A lot of debt will be downgraded to junk status. A lot of that debt will have to be sold at fire-sale prices. A lot of pension funds and hedge funds that once thrived on the high returns they could get from investing in subprime junk will now lose a lot of money."

"S&P's announcement is a death warrant for the subprime industry. No longer will mortgage brokers be able to help buyers lie their way into a home. Fewer stressed homeowners will be able to refinance their mortgage, thus extending and exacerbating the housing bust."

Unwinding this tangled mess is taking time; along the way, it will affect more than just the mortgage industry. Of course it has already hurt the homebuild sector. Higher foreclosure rates have contributed to a rising supply of homes; also, looser loans standards helped fuel a housing boom which assisted in creating future projections that were grossly inflated.
And the subprime mortgage fiasco has not and will not be kind to the banking industry. Depending on who's holding what, investors could be rewarded greatly for making the right bets.

Another sector that could feel the hurt is retail. Fewer homeowners refinancing mean less being spent at home depot or at the mall. We've already seen home depot's hurt. Bed Bath and Beyond has also lowered it's expectations in the last few weeks. The housing downturn might be blamed as the number one reason, but subprime is not far behind. And as the noose tightens around lending standards, the infusion of cash that has helped fuel earnings in retail will evaporate.

Today, just one day after flirting with a record close, the Dow faltered by more nearly 150 points. Following the Dow decline, Asian markets followed suit. Something will act as the catalyst initiating a world-wide economic slowdown. It could be subprime, it could be something else. All that needs to happen is for a spark to start the wheel spinning. The next couple weeks should give us a decisive answer.

DR Horton: New Home Sales Plunge 40%

2007-07-10T12:54:00.000-07:00

The evidence keeps piling up. The housing market is headed for real trouble:

"The Ft. Worth, Texas-based company said net sales orders for its fiscal third quarter ended June 30 dropped to 8,559 homes valued at $2 billion, compared with 14,316 homes or $3.8 billion in the year-ago period."

"'Market conditions for new home sales declined in our June quarter as inventory levels of both new and existing homes remained high, and we expect the housing environment to remain challenging,' said D.R. Horton Chairman Donald Horton in a statement."

Yikes! DR Horton looks to be following in the steps of KB Homes and Lennar, although D.R. Horton has yet to post a loss. That should be coming later this month:

"Home builders have been taking land-related impairment charges during the housing slump, which are further hitting profit margins."

"Morningstar Inc. analyst Eric Landry in a research note said news that impairments would negate any profit 'isn't surprising, as Horton was among the most aggressive land buyers throughout the bubble years and is probably sitting on material amounts of land that doesn't pencil in today's lower-priced environment.'"

Given this information, I think D.R. Horton could end up in worse condition than KB and Lennar. Did you follow my advice and sell in June? If not, I'd say you still have a chance - the bottom hasn't dropped out yet.

World Oil Demand

2007-07-09T21:51:00.000-07:00

According to the International Energy Agency, demand for oil will increase at a greater than anticipated rate:

"...the International Energy Agency, which is based in Paris and advises 26 industrial nations, said that global oil demand would rise by an average of 2.2 percent a year from this year to 2012, up from a forecast in February of 2 percent annual growth from 2006 to 2011."

"The share of world oil consumption represented by the developing world, including emerging industrial economies, will rise to 46 percent of global demand by 2012 from 42 percent, the report said."

Given this information, it's a safe bet that oil companies heavily invested in the exploration and production of oil (upstream operations) will benefit greatly over the next five years. Chevron and Exxon-Mobil to name a few. It's also a safe bet to assume that developing countries could see nice runs in their stock markets. The Argentinian MerVal stock index could be in line to see nice returns. The Bovespa index in Brazil has already seen some solid gains and the Hang-Seng index in China has been going berserk; others may follow. All of this, of course, is contingent on whether or not the world enters an economic recession.
No recommendations for now - I'll update these companies and indexes when I can be more sure about where we are in the economic cycle.

Sirius/XM - Part Two: Campaign Conflicts of Interest

2007-07-09T20:30:00.000-07:00

I had no intentions of continuing this story further...until I did some digging.

It should come as no surprise that the NAB is a major congressional campaign contributor:

"Merger watcher David Trout with M&A Researcher notes that 'this type of concerted political opposition to a merger transaction is extremely rare.' Trout also points out that many of the lawmakers are supported by the National Association of Broadcasters."

The whole letter and list of lawmakers who oppose the merger can be found here. A list of contributions given to members of congress by the National Association of Broadcasters' PAC can be found here for 2007-2008 and here for 2005-2006.

Here are the names of the lawmakers who oppose the merger and receive campaign contributions from the NAB:

Dennis Hastert (R-IL)
Lee Terry (R-NE)
Tom Cole (R-OK)
Cathy McMorris Rodgers (R-WA)
John Boozman (R-AR)
Don Manzullo (R-IL)
Bob Goodlatte (R-VA)
Ray LaHood (R-IL)
Zach Wamp (R-TN)
Frank LoBiondo (R-NY)
Greg Walden (R-OR)
James Jordan (R-OH)
Gary Miller (R-CA)
Roy Blunt (R-MO)
James Sensenbrenner (R-WI)
Gene Green (D-TX)
Charlie Wilson (D-OH)
Melissa Bean (D-IL)
Jim Matheson (D-UT)
David Scott (D-GA)
Baron Hill (D-IN)
John Sprat (D-SC)
Nick Lampson (D-TX)
Charlie Melancon (D-LA)
Ciro Rodriguez (D-TX)
Mike Ross (D-AR)
Mike Michaud (D-ME)
John Barrow (D-GA)
GK Butterfield (D-NC)
Gabrielle Gifford (D-AZ)
Allen Boyd (D-FL)
Shelley Berkley (D-NV)
Zach Space (D-OH)
Bart Gordon (D-TN)
Tom Allen (D-ME)
Marion Berry (D-AR)
Dutch Ruppersberger (D-MD)
Albert Wynn (D-MD)

Twenty three Democrats and fifteen Republicans signed the letter opposing the merger, while at the same time, taking political contributions from the National Association of Broadcasters. MORE THAN HALF of the 72 signatures were from people fostering a conflict of interest to some degree. If your representative appears on this list (mine does), contact that individual and inquire about their ethics. Let them know that you don't support their position, especially when it's bought. You can write your representative here, or call (202) 224-3121.

The US Economy - Speed Bumps and Corn Fields

2007-07-09T19:04:00.000-07:00

As far as financial main stream websites go, Bloomberg wins the prize for keeping it real:

"The U.S. economy's take-off from a near standstill in the first quarter may prove bumpier than the Federal Reserve and many on Wall Street expect as tighter credit acts as a headwind to growth."

"...economists at International Strategy & Investment Group, UBS AG and Commerzbank AG see growth below 2 percent as consumer spending slows and business investment fails to pick up under the weight of tougher financing conditions."

"So far, economists with a gloomy outlook are in the minority. If they are correct, stock-market investors are in for a disappointment."

Remember that all-important investing rule-of-thumb: Don't follow the herd? Investing against the grain takes courage and discipline, but it gets easier when the facts are staring you in the face. For example, the FED recently reported that consumer credit (ie: credit cards, auto loans, etc.) increased at an annual rate of 6.4 percent in the month of May. From Yahoo:

"Consumer borrowing posted a hefty increase in May, reflecting the biggest jump in credit card debt in six months. The Federal Reserve reported Monday that consumer credit rose at an annual rate of 6.4 percent in May, far above the small 1.1 percent gain of April."

The cash in the home ATM has been running out. Thus, consumers are substituting credit cards to feed their materialistic urges. Or perhaps it's food itself. The cost of eating has been growing in a subtle way. Higher prices in meats and dairy seem to be gradual enough for us not to get alarmed. Perhaps no more. This, from the Bureau of Labor Statistics:

"Through the first five months of 2007, beef prices have risen 5.1 percent, poultry prices, 4.3 percent, and pork prices, 3.4 percent. The index for fruits and vegetables, which rose 0.4 percent in April, declined 0.5 percent in May. (Prior to seasonal adjustment, prices for fruits and vegetables rose 1.0 percent.) The indexes for fresh vegetables and for processed fruits and vegetables declined 1.8 and 0.3 percent, respectively, while the index for fresh fruits increased 0.7 percent. The index for dairy products increase 0.5 percent as a 2.2 percent increase in milk prices more than offset a 0.4 percent decline in prices for cheese."

Through the first five months of the year, we've seen a dramatic increase in the cost of meat and milk, two staples of most American meals. And there's no indication that this trend will reverse. When populations are forced to spend more for items of necessity, they either: (a) borrow more, or (b) consume less. Eventually, the 'borrow more' option dries up as credit lines are maxed out, forcing consumers to 'consume less'. And when that happens, earnings (and Wall Street) will take a hit. For the last eight to ten years, our economy has been driven by credit expansion. It cannot, nor will not, continue in perpetuity.

Sirius and XM: Roadblocks to Common Sense

2007-07-09T14:29:00.000-07:00

Give me one good reason why Sirius and XM should not merge. Competition? That's what the 'man' wants you to believe:

"Shortly after the merger was announced, many politicians, as well as the National Association of Broadcasters, a powerful trade organization representing the traditional radio industry, voiced their objection to the merger, arguing that a deal would be anti-competitive and hurt consumers."

How would their merger be anticompetitive? Just because they won't be competing against one another doesn't mean they wouldn't face fierce competition. iPods and podcasts, CD players, other forms of media and entertainment, and of course, terrestrial radio all serve as competition for satellite radio. But maybe that's the problem. A unified satellite radio team would definitely create MORE competition for the members of the NAB and facilitate an even greater market share shift from old to new.

"The deadline to submit public comments is July 9. So far, the National Association of Broadcasters, influential research firm the Carmel Group and seventy-three members of Congress have written letters urging the FCC and Justice Department to shoot down the merger. Meanwhile, consumer rights group Americans for Tax Reform, the Hispanic Federation and retailer Circuit City have written letters in support of the deal."

I doubt as many members of congress would have written letters had Howard Stern not made the jump from terrestrial radio to satellite. In fact, I'd bet the deal would already have been approved if not for that fact.

Economies of scale indicate that a merger of the two could lead to a reduction in the cost of operations, which could be passed on to the subscribers. Furthermore, Mel Karmazin, CEO of Sirius has pledged that if the deal were to happen, current radios would not become obsolete. The deal makes sense.

But I don't see this panning out. There are too many interests that don't want to see the two companies combine. Hopefully they will survive without each other.

Disclaimer: I am a subscriber to Sirius and staunch advocate for the merger. I haven't listened to terrestrial radio in seven months. ( Maybe this is the reason why the NAB is so scared.)

Mortgage Rates Set to Reset

2007-07-09T13:53:00.000-07:00

The looming crisis is getting closer and closer:

"'In October alone more than $50 billion in ARMs will reset,' according to Mark Zandi, chief economist and co-founder of Moody's Economy.com. That's a record, according to Zandi."

"As a result, Doug Duncan, chief economist for the Mortgage Bankers Association (MBA), is expecting as many as 600,000 home owners will get into trouble with perhaps half of them actually losing their homes."

You read that right. Fifty billion dollars in October alone. With the help of Credit Suisse, I outlined the reset schedule here. It's looking true to form. In the tenth month of 2007, we can observe a spike in ARM resets. It will be a record. It will be ugly. It will get worse.

Weekend Video - Ron Paul Hates the FED Edition

2007-07-07T16:20:00.000-07:00

I can't believe I'm advocating for a Republican from Texas, but the man is full of 'radical' ideas of which I mostly agree. From the third video comes this list:

--He has never voted to raise taxes
--He has never voted for an unbalanced budget
--He has never voted to raise congressional pay
--He has never taken a government-paid junket
--He voted AGAINST the patriot act
--He voted AGAINST regulating the internet
--He voted AGAINST the Iraq war
--He has never voted for a federal restriction on gun ownership
--He has never voted to increase the power of the executive branch
--He does not participate in the lucrative congressional pension program
--He returns a portion of his annual congressional office budget to the US treasury every year

Though in the same party as our current president, he's at the opposite end of the spectrum; an antidote he could be.

Ron Paul on Federal Reserve, banking, and the economy:

Ron Paul Owns the FED:

Ron Paul - "Stop Dreaming":

Ron - You're the only Republican candidate I could even consider voting for...please don't make me vote for Hillary by winning the nomination.

Newmont Mining Axes Gold Hedge

2007-07-05T14:32:00.000-07:00

My timing is impeccable. On Monday, I suggested a couple gold ETFs and a couple mining companies. Coincidentally, today one of the mining companies announced that they're doing away with the portion of the business that acted as a gold hedge:

"'With the elimination of our gold hedge book, we have renewed our commitment to maximizing gold price leverage for our shareholders,' CEO Richard O'Brien said in a press release."

I will take this announcement as an indicator that industry insiders are bullish on the future of gold. Don't say I didn't tell you so.

Gold Funds, Mining Stocks

2007-07-02T17:28:00.000-07:00

Gold is getting primed to take a shot up. To cash in, I suggest these ETFs: iShares Comex Gold Trust (IAU) and Streettracks Gold Trust (GLD). The former ended trading today at $65.10 while the latter ended trading at $65.02. I also recommend two mining companies: Newmont Mining Corp (NEM) and Barrick Gold Corp (ABX). The former ended trading today at $39.89 while the latter ended trading at $29.79.

This graph displays the three measures of the money supply:

You'll notice that M1 and M2 extend further out than M3. (Definitions of the components of the money supply can be found here.) The government claimed in 2006 that M3 didn't produce enough useful information to justify the cost of tracking it. You can see where it was heading - up up up. The textbook definition of inflation is an increase in the supply of money. An increase in the money supply causes prices to increase. Since the beginning of the NASDAQ bubble, the money supply has taken off. Major contributing factors include low interest rates, relaxed mortgage lending standards, and major expansions in revolving credit. With every loan made, the money supply expands causing inflation. Inflation is WONDERFUL for gold, gold funds, and mining stocks, thus my recommendations.

iPhone Interest

2007-07-02T12:24:00.000-07:00

Apple iPhone sales beat most analysts expectations, but you wouldn't know it by looking at the price of their stock, which dipped below $120 before closing at $121.26. It closed trading on Friday at $122.04.

Analyst's estimates for unit sales over the weekend were volatile. David Bailey at Goldman Sachs estimates weekend sales to be near 700,000. Gene Munster of Piper Jaffray estimates that as many as 500,000 units were sold. Bill Shope at JP Morgan has one of the more conservative estimates, figuring that 312,000 units were sold:

"'We believe initial demand may have been disappointing, but it's still early,' Bill Shope, analyst at JP Morgan, said in a note to clients. 'We don't believe supply was much better than expected, so demand could be a bit light."'

This is a good point. The fact that the iPhone failed to sell out at a majority of stores means it failed to meet internal estimates, and it could be the reason for the sputtering stock price. The iPhone was most popular in California, a place where status symbols are of the utmost importance:

"Just about every Apple Store in California was out of the iPhone except for two in San Francisco. But in New York only one Apple Store, in Smith Haven Mall in Lake Grove, was reported out of the iPhone, while the other 11 stores in the state had them available, as did the 12 stores in neighboring New Jersey and Connecticut."

"Seattle's University Village Apple Store reportedly had the iPhone, but the other three stores in the state were out, while in Texas, the two Apple Stores in Austin were out of the phone, as was the Dallas store, but the other nine other stores in the state had the phone."

The iPhone seems to have struck out in the highly populated New England area; nevertheless, first weekend unit sales appeared strong, double what analyst expectations were prior to Friday. Can this pace continue? From Goldman Sachs:

"we have increased our iPhone forecast to 5.25 million for calendar 2007 and 12 million for 2008, up from four million and 10.5 million, respectively."

Reaching for the stars, I guess. I think these are gross overestimates, especially if/when the consumer runs out of money and credit. Furthermore, I still believe that the lead-up to the release of the iPhone was overhyped. Apple has gained 45.6 percent since the first of the year, almost all of which was consumer expectations for the iPhone. Could it be that the frenzy Steve Jobs whipped up brought the majority of prospective iPhone buyers out this past weekend? It's quite possible that this past weekend was the exception and not the rule. This puts me at odds with most others:

"'The surge of sales to early adopters was strong, [but] we actually expect the hype to grow in the coming weeks,' said Munster, who holds an outperform rating and $160-a-share price target on Apple's stock."

As for my expectations, I followed the sheep with an estimate of about 150,000 sales for the weekend. I was wrong on that account, but right about the ill-effects the stock price would see. I stand by my prediction that the stock will retreat before significantly going up.

************************************************************************************
Edited - 9:10 PM:
I failed to notice the story about Universal Music nixing a deal with Apple's iTunes, which certainly had a negative effect on the price of the stock:

"Universal Music Group, one of the world’s largest commercial music publishers, has turned down an opportunity to continue a long-term arrangement with Apple, a source confirmed to Macworld."

I don't know the extent to which this contributed to the stock decline, but it certainly opens the doors for more iTunes problems:

"...it will give Universal some breathing room if, say, a big media company approaches them with a promising new way to distribute music digitally and wants to provide some oomph to its launch with exclusive, limited-time access to new releases from the label's hottest-selling artists."

"That would be hard to do under the kind of deals that the major music companies have signed with iTunes. Now, Apple won't have automatic access to all of Universal's music."

This opens the door for other companies in the recording industry to pursue similar arrangements with Apple. It will be interesting to see how this plays out.

June Monthly Recap

2007-07-01T23:30:00.000-07:00

Every month, I will recap the investment strategies that I've suggested. For the month of June, I recommended taking action on 17 items. Below is a summary of the performance of each:

Percentage change formulas for investments I recommend as 'buy' or 'hold' are calculated in the normal and orthodox fashion. For recommendations of 'sell', I have reversed the symbol. For example, I recommended selling Bear Stearns (BSC) on 6/20 at a price of $143.20. Since then, the company has lost 2.23 percent. I calculate this as a 2.23 percent gain.

Top Picks and Flop Picks:

This month's top picks:
1. Beazer Homes (BZH) was a no-brainer when they fired their Chief Accounting Officer. Regardless, there were people who decided to hold it. The percentage gain from selling (or shorting) as opposed to holding was 13.56 percent.
2. Lennar Homes (LEN) was less of a no-brainer. Most analysts didn't think the company would end up losing money in the most recent earnings report. The percentage gain from selling (or shorting) as opposed to holding was 10.74 percent
3. The S & P Homebuilder ETF (XHB) was a pick I've seen coming for many months. Despite what some people will try and say, we're not even close to the bottom in the housing market. The percentage gain from selling (or shorting) as opposed to holding was 7.55 percent.

This month's flop picks:
1. Google was the top flop for the month-end of June. They climbed as high as 533.20 with a peak close of 530.26 on June 26th and have since retreated ever so slightly. The percentage loss was 2.50 percent. I still think they reached a peak on the 26th.
2. AMN Healthcare Services was another top flop in June. I recommended a buy on them after reading an article regarding the medical profession. I still would consider buying into them, but I may think about ensuring there's a stop loss at ten percent. The percentage loss was 1.83 percent.
3. Cross Country Healthcare was the third flop for June. They're in the same boat as AMN and I'm still bullish due to the fact that the demand for healthcare runs way past the supply. The percentage loss was 1.01 percent.

The Dow and the S&P...and ME:

The DJIA closed trading on June 14th at 13553.7305. Since then, the Dow has lost 1.08 percent, closing at 13408.62 on June 29th.
The S & P 500 closed trading on June 14th at 1522.97. Since then, the S & P has lost 1.29 percent, closing at 1503.35 on June 29th. Over the same period of time, my investment picks had a combined average return of 3.01 percent. Although it's always fun to outperform the market, I feel I could have done better. I had a good feeling about gold increasing in price, which fell flat. I also felt that Google was to drop below the five-hundred dollar mark; instead it increased.

The present and the future:

As the month of July transforms from the future to the present, I expect more woes in the real estate industry. I think more homebuilders will change from black to red and I believe that gold and gold funds will become more valuable. I also think we've not seen the end of the bull market in oil. At the end of last week oil closed above seventy dollars. It may still see more gains before the end of the summer. After labor day, I'll become far more cautious as demand for oil in the states decreases. Stay tuned - you might make some money!

Weekend Video - Rip City Edition

2007-06-30T16:20:00.000-07:00

Blazers win the NBA Draft Lottery:

Greg Oden Goes Number One:

Greg Oden Rally in Portland:

Home Builder Inventory, Cash Flows, and Stock Prices

2007-06-28T13:54:00.000-07:00

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:

"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.

KB's "Unexpected" Loss

2007-06-28T11:35:00.000-07:00

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.

Appraisal Fraud

2007-06-27T22:51:00.000-07:00

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'.

Exotic Security Classes, Balloon Payments, and Prepayment Penalty

2007-06-27T21:10:00.000-07:00

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.

Subprime Mortgage Abuse Continues

2007-06-27T17:52:00.001-07:00

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."

"'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.

"According to Doug Duncan, chief economist for the Mortgage Bankers Association, troubled lenders are aggressively making new loans for an infusion of cash. 'They're gambling,' said Armstrong, 'doubling down and that's a recipe for disaster.'"

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

2007-06-27T17:01:00.000-07:00

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.

S-E-C: 12 Investigations Launched!

2007-06-27T13:20:00.000-07:00

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.

Another quick look at CDOs

2007-06-26T17:57:00.001-07:00

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.

Lennar's Losses

2007-06-26T12:47:00.000-07:00

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.”

Last Wednesday, I suggested that the savvy investor might sell (or short) Lennar and other homebuilders, citing inventory as a major factor. If you haven’t yet, you still have a chance. There will be many more quarterly earnings reports painted red before the market recovers. Next up is KB Homes, which is supposed to report earnings on Thursday morning. We shall see.

Home Prices Fall...AGAIN!

2007-06-26T10:15:00.000-07:00

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.

Nursing Shortage

2007-06-25T18:25:00.000-07:00

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.

Mortgage Rate Reset

2007-06-25T17:30:00.000-07:00

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

iPhone Update

2007-06-25T14:20:00.000-07:00

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:

"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.

Weekend Video

2007-06-23T16:20:00.000-07:00

Housing Bubble: Market Crashing in Slow Motion:

Housing Bubble versus the Great Depression:

Our Economy Right Now:

Are You Saving Too Much??

2007-06-22T18:21:00.000-07:00

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.