Housing Follow-up
My last post generated some questions that deserved their own focus:
1. Where do you make money from this popping housing bubble
2. Is it counter-intuitive to say the market will rise as housing falls
MAKING MONEY
I got burned in the Fall shorting housing related stocks too early. (I did do well only with BMHC puts). Even analysts belatedly seem to question the sector, but they are still mild in their assessment. That is, the gap between analyst estimates and reality is still huge. Part of that is driven by corporate statements that are equally out o ftouch. It's the blind leading the blind. Or liars leading the suckers - recall that executives at most construction companies cashed out their options 1 year ago, and also recall the JP Morgan analysts who said last month that the worst was over for housing construction.
My view: this is like 2001 and just when you think CSCO can't go any lower, it does.
I'll do some checking but the obvious targets start with sub-prime lenders. The entire housing boom rested on easy credit provided by subprime lenders. They sold the loans on but with obligations to buy them back if the loans underperformed. That is now happening and they don't have cash reserves set up to handle the buybacks. They unloaded the hot potato on someone else but it's being dumped on them. I'm talking about underperforming loans on property that is clearly worth 80% of the loan.
They'll go bankrupt first, sticking the investors (Merrill Lynch and Morgan Stanley, among others) with the bill.
The only lender to avoid as a target is Countrywide. I wouldn't short a bank that might be acquired.
Next in my sights are material suppliers. Lumber companies, dry wall companies, and so forth. (Lousiana Pacific and Gypsum come to mind). Again, they have dropped, but I see more dropping.
Next up, apartment REITs. The amount of vacant housing waiting to be sold is staggering. These units will convert into rentals, and they will pressure apartment prices. In the Fall I left a $1700 monthly apartment 1100 ft2 to rent a house for $2000 and it's 1500 ft2. Plus it's a house, in a neighborhood, etc. This will really show up as a big trend in the Summer as housing investors capitulate and try to stop the pain.
Finally, smaller home construction companies. I actually think the big boys are almost past the bad pain. They are showing business maturity: writing down the land options and pressuring suppliers. In essence, they will probably do another round of major write-offs between now and the Summer and position their books to look healthy for 2008. The smaller players, however, don't have the same deep pockets.
I'll see what I can do to find some good companies to consider shorting.
MARKET UP WHEN HOUSING DROPS?
There is no denying the breadth and depth of impact when the bubble really pops.
Consumer spending will drop when 1 million people are fired and when homeowners face retreating home prices and tougher financing.
The pain will be felt in many places: retailers and restaurants as well as high-end toy makers (cars, jet skis, boats).
But there is a lot of money in this world, and it has to flow somewhere. There aren't that many places to turn, and I think a prime destination will be the US equity market for three reasons:
1. Economy still growing
2. Undervalued Equity markets
3. Debt market implosion
The latest news shows a strong US economy.
* GDP at 3.5% for the Q4 2006
* Consumer confidence up
* Manufacturing up
Relatively low historical P/E.
The current S&P P/E is at a 10 year low of 18. The 100 year historical average is 14.5 and a few years back we were at 30. And the P/E is still dropping. Some folks want to remove energy from the equation, but there is always something that will distort the picture: today it's oil, in the 90s it was the dot.com companies.
Bottom line, the US equity market is priced nicely for a still growing economy. Especially if the world grows faster and that helps US companies.
Where else can money flow? The housing market will translate into a global debt fiasco. That will drive money away from the bond markets and back to equity markets.
1. Where do you make money from this popping housing bubble
2. Is it counter-intuitive to say the market will rise as housing falls
MAKING MONEY
I got burned in the Fall shorting housing related stocks too early. (I did do well only with BMHC puts). Even analysts belatedly seem to question the sector, but they are still mild in their assessment. That is, the gap between analyst estimates and reality is still huge. Part of that is driven by corporate statements that are equally out o ftouch. It's the blind leading the blind. Or liars leading the suckers - recall that executives at most construction companies cashed out their options 1 year ago, and also recall the JP Morgan analysts who said last month that the worst was over for housing construction.
My view: this is like 2001 and just when you think CSCO can't go any lower, it does.
I'll do some checking but the obvious targets start with sub-prime lenders. The entire housing boom rested on easy credit provided by subprime lenders. They sold the loans on but with obligations to buy them back if the loans underperformed. That is now happening and they don't have cash reserves set up to handle the buybacks. They unloaded the hot potato on someone else but it's being dumped on them. I'm talking about underperforming loans on property that is clearly worth 80% of the loan.
They'll go bankrupt first, sticking the investors (Merrill Lynch and Morgan Stanley, among others) with the bill.
The only lender to avoid as a target is Countrywide. I wouldn't short a bank that might be acquired.
Next in my sights are material suppliers. Lumber companies, dry wall companies, and so forth. (Lousiana Pacific and Gypsum come to mind). Again, they have dropped, but I see more dropping.
Next up, apartment REITs. The amount of vacant housing waiting to be sold is staggering. These units will convert into rentals, and they will pressure apartment prices. In the Fall I left a $1700 monthly apartment 1100 ft2 to rent a house for $2000 and it's 1500 ft2. Plus it's a house, in a neighborhood, etc. This will really show up as a big trend in the Summer as housing investors capitulate and try to stop the pain.
Finally, smaller home construction companies. I actually think the big boys are almost past the bad pain. They are showing business maturity: writing down the land options and pressuring suppliers. In essence, they will probably do another round of major write-offs between now and the Summer and position their books to look healthy for 2008. The smaller players, however, don't have the same deep pockets.
I'll see what I can do to find some good companies to consider shorting.
MARKET UP WHEN HOUSING DROPS?
There is no denying the breadth and depth of impact when the bubble really pops.
Consumer spending will drop when 1 million people are fired and when homeowners face retreating home prices and tougher financing.
The pain will be felt in many places: retailers and restaurants as well as high-end toy makers (cars, jet skis, boats).
But there is a lot of money in this world, and it has to flow somewhere. There aren't that many places to turn, and I think a prime destination will be the US equity market for three reasons:
1. Economy still growing
2. Undervalued Equity markets
3. Debt market implosion
The latest news shows a strong US economy.
* GDP at 3.5% for the Q4 2006
* Consumer confidence up
* Manufacturing up
Relatively low historical P/E.
The current S&P P/E is at a 10 year low of 18. The 100 year historical average is 14.5 and a few years back we were at 30. And the P/E is still dropping. Some folks want to remove energy from the equation, but there is always something that will distort the picture: today it's oil, in the 90s it was the dot.com companies.
Bottom line, the US equity market is priced nicely for a still growing economy. Especially if the world grows faster and that helps US companies.
Where else can money flow? The housing market will translate into a global debt fiasco. That will drive money away from the bond markets and back to equity markets.
posted by Andrew at
9:04 AM
2 Comments:
You have some excellent points here. I wanted your opinion on UCTT which is set to release earnings on Monday I believe. Do you think they will blow the estimates and the stock goes up?
Like this article. Good information. Do post later some good short candidates.
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