Market takes a Breather/Hovnanian

Good afternoon!

The stock market is taking a little breather today as the data this morning was fairly benign. Jobless claims came in at 365,000 which was down about 18,000 from the week before. Nothing earth shattering there. The claims are still high and show no real signs of improvement.

Retailers also came in mixed. Walmart and Costco are both doing well because the consumer is under so much pressure. Any low cost retailer is probably going to pretty well in this environment as everyone tries to simply keep their head above water. May's numbers will be market movers because we will see how much the stimulus checks helped the retailers.

The financials are still taking a beating after receiving the news about the transparency demand from the SEC yesterday. Europe also held rates which will continue to pressure the dollar.

The financials were also pressured by Nationwide and Fortress who reported terrible earnings.:

Fortress:

"May 8 (Bloomberg) -- Fortress Investment Group LLC said first-quarter profit tumbled 74 percent as gains from the New York-based company's private-equity and hedge funds all but dried up, sending its stock down the most in seven weeks."

Nationwide:

"COLUMBUS, Ohio (AP) -- Nationwide Financial Services Inc.'s first-quarter earnings plunged 79 percent on an investment loss, the investment manager said Wednesday.

The Columbus, Ohio, company, which manages company retirement plans, said net income dropped to $44.5 million, or 32 cents per share, from $208.3 million, or $1.42 per share, in the year-ago period.

The latest quarter included a realized investment loss of $87.9 million, or 64 cents per share. A year ago that loss was $7 million, and the company booked a gain of $45.5 million, or 31 cents per share, from the sale of a unit."


Hovnanian Enterprises Inc.

There was some interesting news out of Hovnanian today that smelled of desperation. The stock was down 11% on this news.

"May 8 (Bloomberg) -- Hovnanian Enterprises Inc., New Jersey's largest homebuilder, fell as much as 9.9 percent in New York on plans to raise up to $191 million in a stock sale.

The company will sell up to 16.1 million Class A shares at the May 6 closing price of $11.87 each, Red Bank, New Jersey- based Hovnanian said yesterday in a regulatory filing. The offering would expand the outstanding Class A stock by as much as one-third to about 64 million shares.

``Hovnanian's financial position remains tenuous and the equity offering is a sign that fresh capital is desperately needed to support ongoing operations,'' analysts Frank Lee and Jeffrey Wichmann of New York-based CreditSights Inc. wrote in a report today. The cash would also ``alleviate the concerns of bank lenders,'' they wrote.

The company, headed by Chief Executive Officer Ara Hovnanian, reached an agreement with banks in March to modify borrowing rules. The accord allows Hovnanian's tangible net worth to fall to lower levels before the company is considered in default, reduces the amount of revolving credit to $900 million and requires collateral on the debt, the company said.

The new credit line was secured with first-lien mortgages on Hovnanian-owned properties, according to Chief Financial Officer Larry Sorsby. About $306 million of the $900 million was available for Hovnanian to borrow, he said.

If the underwriters don't buy the stock available to them, the offering of 14 million shares would raise $157.4 million, the company said."


My Take:

Uh oh, looks like someone is running out of money. I have been warning for weeks that you will see a string of builder go bankrupt as the housing crisis deepens. Hovnanian is one of the names rumored to be in trouble.

They must be in real bad shape from the looks of this stock dilution. Hovnanian now has less availability to borrow but the banks are allowing them to drop to a lower value before they are considered to be in default. Basically the noose is still around their neck, but the banks are giving them a little more time after they raised some cash.

I am curious to see what a Hovnanian home will sell for going forward. Sounds like its time for a home sale!!

Bottom Line:

If housing prices continue to drop, and of course they will, then Hovnanian and other builders will run out of options. They are operating on fumes and their crapboxes continue to not sell.

Something needs to give and it will eventually be home prices or these firms will go under. Companies that are already in this bad a shape will run out of cash.