It's Like Beating a Dead Horse

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

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

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

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

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

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

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

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

The Beazer Blunders Continue

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

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

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

You got all that??

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

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

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

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

Could it???

Market Rally: Deniabull

Bloomberg is reporting that homebuilders could be a buy now:

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

Homebuilders are not buys right now. Not with this.

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

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

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

KB Homes: The Future Looks Bleak

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

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

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

Out...Just in Time

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

Halo 3: Beating Goals, Breaking Records

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

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

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

Homebuilder News: Bad and Worse

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

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

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

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

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

Recovery looks bleak for SPF.

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

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

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

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

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

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

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

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

The Halo Bump?

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

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

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

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

The Goldman Sachs Lesson (as told by a professional)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

An Interesting Take...

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

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

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

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

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

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

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

The Beazer Homes Rumor

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

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

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

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

The Golden Rule? Gold Will Rule

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

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

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

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

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

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

The Bears are Breaking the Banks

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

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

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

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

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

NY Times: Homebuilders See Inventory Value Decline

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

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

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

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

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

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

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

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

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

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

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

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

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

Dow(n) Drops Another 200

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

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

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

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

Homebuilders Tank; Dow(n) Jones

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

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

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

What about DR Horton? From Yahoo:

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

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

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

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

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

iPhone Estimate: iWasRight

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

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

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

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

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

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

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

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

More Metal ETFs and Indexes

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

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.