Tuesday, April 22, 2008

Financial News/Housing Data/Home Builder Buying Warning

Well stocks have gotten off to a very shaky start today as more bad news in the financials was reported today. I think the banks earnings reports have been more grim then many expected this week, and I suspect many on Wall St. are starting to second guess their bottom fishing and have decided to lighten their positions in the financials. Many of them are down today.

One of the reasons for this was there were more disappointing results from the financials today. I will report some of these results before I talk about the home builders.

Sun Trust missed earnings estimates as profits dropped 45%. Here is the scoop from Bloomberg:

"SunTrust Banks Inc., the largest bank based in Georgia, said first-quarter profit fell 45 percent after the company set aside more money to cover bad loans to homeowners and builders.
Net income declined to $283.6 million, or 81 cents a share, from $513.9 million, or $1.44, in the same period a year earlier, the Atlanta-based company said today in a statement. The figures include expenses from preferred dividends. That's lower than the average estimate of $1.03 a share from 21 analysts surveyed by Bloomberg."


RBS also announced today that they are taking $11.7 billion in writedowns due to bad loans and announced they are raising $24 billion dollars in new capital by selling additional shares of stock. More dilution!!! From Bloomberg:

"Royal Bank of Scotland Group Plc, the U.K.'s second-biggest lender, will sell 12 billion pounds ($23.7 billion) of new shares to investors in Europe's largest rights offer to boost capital depleted by writedowns.
RBS fell as much as 5.7 percent in London trading after saying it marked down assets by 5.9 billion pounds and will cut the 2008 dividend.
Chairman Tom McKillop defended Chief Executive Officer Fred Goodwin, saying ``our executive team has all the ability to steer the bank through this tricky period in financial markets.''

My Take:

Expect this to be a continuing theme quarter after quarter as home prices continue to fall. These announcements of losses quarter after quarter are going to get old real quick with investors. You will start to see more selling on the bad news versus buying on the bad news as investors will start to lose confidence that they are buying at the bottom.

There is no sign of the housing crisis being anywhere near over, and banks will continue to take hits as prices drop.

CNBC Alert:

CNBC just announced some new March housing data. Existing home sales dropped another 2% in March and inventories rose to 9.9 months. Prices also dropped 7.7% from March of last year. Isn't this supposed to be the big spring buying season where everyone buys? What a joke.

Here was the most startling statistic from CNBC's report: 18% of homes that are now on the market are listed at prices below what the seller paid for them. This means that almost 1 out of 5 homes on the housing market are going to be short sales when they sell.

So much for housing as an investment. This number is incredible. If you think banks are recovering anytime soon you can forget it.

This number would probably be higher if unrealistic sellers trying to get 2005 prices decided to price their homes correctly.

A quick warning on the home builders:

Anyone buying builders thinking they have bottomed really needs to do their homework. I recently discussed building cycles with some contacts on Wall St. involved in this area.

Banks always allow builders some time to sell units before they start pressuring them on getting paid back. They realize it takes time for properties to sell and usually they are given about 2-3 years to move the units before they really get pressured to pay back their loans.

What is unknown right now is how much slack the builders are getting from banks as we struggle through a brutal housing market. Usually during downturns the banks will force them into bankruptcy if they can't get paid.

Whats funny is they almost always give them their credit back once the cycle turns back up because its such a profitable business when the housing market is booming.

If you are buying builders right now realize that most of the banks have not turned up the heat as they allow them to try to dump inventory in a tough environment. As these banks continue to struggle with their capital ratios expect them to start asking for their money back.

There will be many bankruptcies down the road as this housing bubble bursts. I would avoid buying any of the builders right now even though they look cheap. There are some that will end up being great buys. There are many however that will go under.

If you want to take a shot at these make sure any builder that you buy has a solid balance sheet with lots of cash.


wenbryant said...

You are absolutely right! The housing market is crazy and Starbucks is a good indicator of what's to come. I was recently in Asia and the comparison to here is astounding.

Jeff said...


Thanks for the nice comments. It sure looks like Japan all over agin doesn't it? Learn anything interesting when you were out there?