Market Notes and Links of Interest

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

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

Another sign of America's laziness?

The US Dollar: rock bottom is yet to come.

Intel has gone green.

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

Google and Firefox: a marriage of technology.

Solar stocks run into a congressional problem.

It's Like Beating a Dead Horse

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

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

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

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

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

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

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

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

The Beazer Blunders Continue

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

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

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

You got all that??

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

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

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

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

Could it???

Los Angeles' Office Market: Four Months Later

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

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

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

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

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

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

Links Worth Mentioning...

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

Are there big things happening at Maguire Properties?

Housing starts: things will get worse.

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

Will natural resources become the biggest boom ever?

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

Torre to Steinbrenner: NO! Good for Joe!

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

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

Links Worth Mentioning...

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

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

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

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

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

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

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

Q and A for a weak dollar.

Crude tops records. Is retail gas soon to follow?

Market Rally: Deniabull

Bloomberg is reporting that homebuilders could be a buy now:

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

Homebuilders are not buys right now. Not with this.

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

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

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

Mad Money or Famous Flop?

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

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

KB Homes: The Future Looks Bleak

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

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

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

Out...Just in Time

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

Halo 3: Beating Goals, Breaking Records

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

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

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

Homebuilder News: Bad and Worse

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

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

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

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

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

Recovery looks bleak for SPF.

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

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

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

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

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

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

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

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

Default Rates Stabilizing...For Now.

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


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

The Halo Bump?

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

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

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

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

Housing Market: More Bad News

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

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

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

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

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

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

The Goldman Sachs Lesson (as told by a professional)

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

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

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

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

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

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

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

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

More Rate Cuts to Come?

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

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

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

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

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

A Little Too Late...

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

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

President Bush and Economic Optimism

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

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

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

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

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

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

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

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

Deja Vu?

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

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

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