Wednesday, April 23, 2008

California Housing Woes Accelerate in March

I regularly check on the state of affairs in California's Housing market for a basic reason: the US consumer economy will go where the Californian consumer takes it. Californians are/were the dominant consumer force in the US, and they bankrolled this spending with the housing boom.

Plus I live here and I would like to buy a house.

http://www.dqnews.com/Charts/Monthly-Charts/CA-City-Charts/ZIPCAR.aspx

Today we have the March sales figures. It’s very hard to extrapolate much about price trends because sales volume is so low. Menlo Park had only 5 home sales and the median price fell 50% since last year. It’s probably not safe to apply that to all of Menlo Park going forward.

Where we do have volume, the trends are falling prices in the blue collar towns (San Bruno, Daly City, South San Francisco) and stable prices in wealthier towns (San Francisco, San Mateo, Mountain View).

The crumbling price effect is getting closer and closer to prime Bay Area territory. These aren’t towns on the margins where it’s an hour to drive to San Francisco. Daly City is less than 10 miles away.

Also, Silicon Valley areas are showing similar signs of stratification. San Jose & Santa Clara are very down while wealthier areas like Cupertino, Mountain View, & Sunnyvale are doing very well: up 15%+. Again, looking only at the towns with high sales volumes.

It’s becoming like an oasis where towns like Palo Alto and Cupertino anchor thrive but the next-door neighbors are crashing. I think that will remain the case for at least a year, but then major wealthy areas like Palo Alto will come down as well. Why? It’s not a coincidence that higher foreclosure rates, falling prices, and big housing developments are all in the same cities. Palo Alto did not have big blocks of homes thrown up the way Santa Clara and San Jose did.

For example, this is the Santa Clara Notice of defaults:
Q1 2007 1,056
Q4 2007 2,162
Q1 2008 3,074

It took almost a year for the NODs to grow by ~1,000 homes. It took 3 months for them to grow another 1,000.

Those trends are similar across California: up 39% from Q1 2007 to Q42007 and then up 141% from Q4 2007 to Q1 2008. Almost 114K homes in the last quarter began the NOD process. The NOD is the last step before foreclosure and it is an indicator of what to expect. Critically, the rate of conversion from NOD to actual foreclosure has shot up from ~50% to ~70% in 1 year. Which is easy to understand if housing prices dropped 20% in 1 year.

Consider the tax revenue implications. Out of 35 counties, only 1 had positive increase in sales prices: San Francisco with 0.67% change in the median price. Most of the others had at least a 20% drop. California depends on property taxes and that base will shrink, especially as current homeowners ask for re-appraisals to lower tax exposure.

Consider the consumer spending implications. Lower home prices reduce everyone’s home equity, which in turn spurs banks to cut back home equity lines. No more borrowing against the house for home improvements, new cars, etc. I don’t see much impact on consumer spending by those under foreclosure – they have been stretched tight for a while already.

For the State and the individual, borrowing is no longer the route to living a lifestyle. The return to affordability will be refreshing but will also crush everyone in the consumer world. Do-it-yourself courses will probably come back into fashion (Learning Annex courses on gardening, clothes-making and so forth).

A decline in prices will lead to a decline in prices.

Monday, April 21, 2008

The Week Ahead - Lots of negative news

It's a quiet week for us - only AGN reports and the government has very little news.

But the sentiment will be negative for anyone not in energy or agriculture. ALready the Asian markets are negative.

Texas Instruments, Netflix, the bad news keeps rolling in. Companies don't expect much growth this year.
Meanwhile, the financial institutions keep writing down billions. Today it was National and Bank of America.

The ability of the market to shrug this off is very puzzling, unless you buy into my Last Gasp Theory.
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Tueday brings us Existing Home Sales for March. Expect doom and gloom.
Thursday is the March durable goods info. That won't be good, as GE has already shown.

AN reports Thursday. Given the dismal state of US car sales, I just don't understand what propels this stock. But it is all low volume buying, so it has no real conviction. Meanwhile, the guy who is really deep into this company is also running Sears (SHLD). And they are doing very poorly as well. I mention this because his funding may be running out.

They are expecting $1.46 EPS through December, a P/E of 11. I don't see that. They have missed 3 of the last 4 quarters, most recently 13% below expectations. I think that will accelerate and they will get maybe $0.20 per quarter or $1 for the year. That plus doom and gloom should push the stock closer to $10

Website Update

I have been working on the website - lots to be done.
I really hope that you guys like it when it's finally up and running

Hopefully in 2 weeks????

ZLC Problems Ahead?

http://seekingalpha.com/article/73033-zales-vs-peers-possible-difficulties-ahead

Bsaically it agrees with my premise that ZLC is in for a world of hurt
But theypoint out that we may be premature - December holiday buying drives their business, so we may have to wait until January.

Or, maybe the market takes a big, fat tumble and we get out sooner

CF assigned, ETFC Not assigned - waiting to write more call options

CF was assigned and we received $130 per share.

The 1000 shares of ETFC was not assigned - meaning that the market did not exercise the call options and we are free to write some more.

We could get $0.30 right now for the May $4.
Our purchase was $4.07 and we netted $0.35, making our current cost basis $3.72
If we write the calls today, we would bring the cost basis down to $3.42. If they get assigned in May, that is a 17% profit in 6 weeks.

I think ETC will actually rise >$4 in the next week, so I will keep the powder dry.

Lsat Gasp Revisited

http://liverocket.blogspot.com/search?q=last+gasp

On APril 5th and 7th I presented what I call the Last gasp Theory. Looking at the last 2 recessions, I noticed two similarities:
1. Markets surge ~15% right before they begin the big crash
2. The final surge ocurs AFTER the recession has begun, typically a few weeks after

The Dow doesn't drift along and then suddenly fall - it shoots up and then drops down hard. hence the Last Gasp. And form a timing standpoint, it does it AFTER the recession has begun.

A cursory reading of headlines shows that recession is nearby, if not already here.
Meanwhile, the Dow has moved from 11,700 to 12,900, a 10% surge. Could this be it?

Clearly the market is behaving irrationally. Very bad news is released, and the market sentiment remains positive. HOG, for example, cuts EPS expectations 20% and begins to hunker down for bad sales. But the stock rose ~4% Friday.

This is what I would expect to see. The market fools itself into thinkingthat all will be well. It can't possibly be midnight yet; the bell isn't about to toll an dturn Cinderella into a pumpkin.

We are obviously short and this surge hurts in the near term. The market could go a few more points higher before crashing like a wave on the surf. If it does, we'll short more.

In the meantime, patience