Everywhere I go in the suburban wonderland where I live there seems to be a new housing development. When I visited my brother- and sister-in-law in a neighboring town, I must have passed seven of them. Apparently, word of the housing slowdown has not reached Burlington County, New Jersey.
This seems like madness. After all, the housing market is in the tank. Applications for mortgages fell 23% on a seasonally adjusted basis for the week ended September 26, according to data from the Mortgage Bankers Association cited by Reuters. U.S. single-family home prices fell a record 16.3 percent in July from a year earlier, according to the Standard & Poor's/Case-Shiller Home Price Indexes.
Consumer confidence is shaky -- heck, I am not feeling so confident even though I bought a car. Foreclosures are at record levels -- still. Banks are tightening their credit standards, making it difficult for borrowers without sterling credit to get loans or refinance their existing ones. That's what makes the rise in the home builder stocks even more baffling.
Shares of Hovnanian Enterprises Inc. (NYSE: HOV), Toll Brothers Inc. (NYSE: TOL) and Lennar Corp. (NYSE:LEN) all gained double-digit percentages in the third quarter. The reason? Investors are chomping at the bit to call a bottom in the housing market. But I sat that's premature. S&P points out that many metropolitan areas are showing double-digit declines in home values. "There are signs of a slowdown in the rate of decline across the metro areas but no evidence of a bottom," David Blitzer, chairman of S&P's index committee, said in a statement.
While the earnings crunch for this quarter is all but over, there is still plenty of action in the earnings arena this coming week. For instance, analysts surveyed by Thomson Financial are expecting America's Car Mart Inc. (NASDAQ: CRMT) and Campbell Soup Co. (NYSE: CPB) to be among this week's top earnings gainers.
Bentonville, Ark.-based America's Car Mart is expected to post net income of 38 cents per share (up 52.6% from the same period a year ago) on revenue of $73.8 million (up 25.8%). The used car dealer chain has tended in recent quarters toward positive surprises -- by 21 cents per share, or 73.5%, in the previous quarter. The long-term EPS growth forecast is 15%, about the same as the S&P 500. The consensus recommendation of analysts is to buy CRMT.
Campell is tentatively scheduled to report this week, and the world's biggest soup maker is expected to post net income of 25 cents per share (up 44.0% from a year ago) on revenue of $1.7 billion (up 7.5%). The Camden, N.J.-based company has just missed earnings estimates in the past three quarters. Its long-term EPS growth forecast is 7.5%, which is less than the industry average, but about the same as rivals Kraft Foods (NYSE: KFT) and Heinz (NYSE: HNZ). The analysts' consensus recommendation is currently to buy Campbell.
TheStreet.com's Jim Cramer says our problems are so widespread, he sees lots more IndyMacs before we're out.
You don't need me to tell you it's awful out there. You don't need me to tell you that there's no quick fix for any of these things. But what might help you understand why it feels so bad this time is that I have never, in my career, seen so many companies go off track at the same time. This is one unbelievable moment, and it is made more horrible by the day as companies' stocks just get pummeled, causing people to then question the very viability of the companies involved.
First, obviously, are Fannie Mae (NYSE: FNM) (Cramer's Take) and Freddie Mac (NYSE: FRE) (Cramer's Take). We don't know what will happen, but we do know that their futures are much darker than their pasts. Their best hope: a Democrat becomes president and shows the usual love to both. But as investments, they are pretty much perma-losers going forward. The losses are that heavy. Yes, it is true that two years from now they will be better, but will the government let them limp through to that? View them as calls on a Democratic win.
We all know that Citigroup (NYSE: C) (Cramer's Take), Wachovia (NYSE: WB) (Cramer's Take), Washington Mutual (NYSE: WM) (Cramer's Take) and National City (NYSE: NCC) (Cramer's Take) are in trouble. Bank of America (NYSE: BAC) (Cramer's Take) says it isn't in trouble, but obviously the market doesn't believe management because the stock failed to rally when it said its dividend was safe. Any short-selling hedge fund could hire 30 actors and have them line up at a Washington Mutual or two and get a bank run going. Then we would have to hear about a "hasty" Treasury department plan to bail out WM. Hasty? How can these guys not see it coming?
Thomas Weisel downgraded Yahoo! (NASDAQ:YHOO) to "underweight" from "market weight," according toBriefing.com. The news service also reports that UBS upped its price target on Potash (NYSE:POT) from $250 to $285.
MOST NOTEWORTHY: S1 Corp, CME Group and Elizabeth Arden were today's noteworthy upgrades:
Stephens upgraded shares of S1 Corp (NASDAQ: SONE) to Overweight from Equal Weight after meeting with management to reflect their increased confidence in the company's ability to execute. The firm maintains a $9 target on the stock.
Citigroup upgraded shares of CME Group (NYSE: CME) to Buy from Hold as they find the risk/reward attractive with volumes picking up and consensus estimates at more rational levels. The firm maintains a $485 target.
Oppenheimer raised Elizabeth Arden (NASDAQ: RDEN) to Outperform from Perform on valuation, as they believe the current share price does not adequately reflect potential earnings accretion from the company's licensing agreement with Liz Claiborne (NYSE: LIZ) or restructuring savings.
UBS has upgraded Hovnanian (NYSE:HOV) to "neutral" from "sell," according toBriefing.com. The news service also reports that Oppenheimer raised its price target for Verisign (NASDAQ:VRSN) to $42.
Lehman Brothers affirmed it "overweight" rating on Bank of New York (NYSE:BK) ahead of the company's annual meeting with brokers, according to the AP.
Here's a peek at what analysts surveyed by Thomson Financial are expecting from companies scheduled to report quarterly results in the first week of June, 2008.
The following companies are expected to post earnings growth, compared to the same period in the previous year:
Take-Two Interactive (NASDAQ: TTWO) up 136.6% (from a loss) to $1.12 per share, on $499.1 million in revenue
How did we get here anyway? Housing and construction companies have been crushed as the bubble burst and now investors have to make a critical decision. Do you stay and hope for a recovery or bag it and move to another position that has the potential to provide better returns?
The problem is simple to explain: Most investors hate taking a loss. In fact, most investors will look to get "even" before they sell and this attitude usually leads to greater losses, anxiety and poor decisions. The truth is that much of this can be avoided with proper risk management techniques. If any of this describes you, then consider developing a plan for risk management and a discipline that will help to protect your hard earned principal. Now, more than ever, investors need a plan. We all need a plan that includes well developed risk management disciplines, which is why I dedicate a full chapter to it in my book, The Disciplined Investor.
Monday, June 2
The week begins with the 10 am release of construction spending and the ISM Index. Construction spending is expected to continue to be weak as is the ISM.
Then we have a few housing-related earnings releases that should be of interest. Watch NCI Building Systems Inc. (NYSE: NCS). This company is engaged in manufacturing and marketing of metal products for the nonresidential construction industry. Terrific! This is a company that is suffering along with the entire construction sector...that is for sure. In fact, they company lowered the outlook for the remainder of the year back in March. It stands to reason that not much is better. The ace in the hole is the recent trend of lowering expectations and then coming out with an earnings beat. Even so, this has too much potential for problems and the sideline is a good vantage point to watch the earnings announcement, which is expected to come in with a PROFIT of 31 cents per share on $365 million of revenue. (Uh...That I would like to see.)
TheStreet.com's Jim Cramer says the mortgage problem is in the process of cresting, which is why the stocks have largely bottomed.
We are in the heart of default country, and we knew we would be. This is the toughest moment. You need to go back and look at the calendar to realize the astonishing acceleration in defaults. It's simple: This moment two years ago is when the underwriting standards were the lowest, and this is the moment when the defaults will be the highest because the loans are resetting at high levels and most of the lenders, lenders like Countrywide (NYSE: CFC) (Cramer's Take), are more interested in getting as much out of a borrower as possible before kicking him out than working out the loan.
Think about it.
In the second quarter of 2006, the housing industry was going strong. We were in the 7-million-homes-changing-hands mode, and the vast majority of those homes required little money down, with home equity loans being taken out immediately to pay whatever little interest was being charged. These were the moments of the ultimate no-doc-high-fee loans by New Century Financial, Ameriquest, Resmed (Ditech), American Home Mortgage, Novastar, and of course, Countrywide. This was when the homebuilders' mortgage arms lent the most terribly.
Despite the fact that the challenging housing conditions are still persisting, it looks like that some major housing companies are poised to see the light at the end of tunnel. SmartMoney underlines the fact that there has been some encouraging trend for homebuilders during the past few months.
The National Association points out that, "the housing market has shown no evidence of improvement thus far," and the sentiment index is close to a historical low.
Looking at investing in housing stocks, one analyst at T. Rowe Price, Josh Spencer, makes a two-way analysis. From his point of view, housing stocks have a lot of risk if we are talking about their volatility, but they are not as risky when referring to a long-term time horizon due to their current cheap value.
TheStreet.com's Jim Cramer says the guys at the top don't know what they're doing, and it shows.
AIG's (NYSE: AIG) (Cramer's Take) making everyone's life difficult today. That's in part because AIG had been the biggest proponent of "super senior," meaning they repeatedly said that their collateralized debt obligation (CDO) exposure was of the kind that was intelligent, measured and thoughtful. They talked endlessly about how their due diligence made the difference and that unlike all of the other buyers, they kicked the tires three times and never bought the plain ol' CDOs. Then they brought in professors from Wharton to be sure that even if all heck broke loose and they were being too aggressive, they would be hedged.
They also were the first to give you the percentages of how much could go bad and that even in the worst-case scenario, they were overcapitalized. And, most important, they were insurers, no need to mark to market, they can play it all out.
Plus, they touted their own struggles. They made the point that because of the turmoil at the top, they hadn't bought any bad stuff and stopped buying residential real estate products after 2005. What they did buy -- they assured us in that big teach-in dog-and-pony show in December -- was the extra-special nature of their particular buys and that, unlike everyone else, risk officers scrutinized every single piece of paper that went into their super senior insurance, meaning only the top-top part of a CDO-squared, the part where everything had to default ahead of it; they made a point of how impossible that would be.
Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) reported a 64% drop in quarterly profit late Friday. At the company's annual meeting this past weekend, the legendary investor said that while a Berkshire unit has bought portfolios of subprime mortgages (and has frozen resets that were due to send interest rates on those loans higher) he warned investors that housing-market weakness isn't over yet and predicted more losses for banks. At the same time, Buffett said Sunday he will consider investing in the insurance business of U.K. banking giant Royal Bank of Scotland (NYSE: RBS) and is close to buying a medium-sized company in the country.
Hovnanian Enterprises Inc. (NYSE: HOV) estimated on Monday it would take $225 million to $275 million of land-related charges for the that fiscal second-quarter and said that home deliveries dropped 21% to 2,494 homes in the period. The company also turned cash-flow positive faster than it expected and tripled its full-year estimate of cash flow.
After being rejected by Continental Airlines Inc. (NYSE: CAL) last month, United Airlines parent UAL Corp. (NYSE: UAUA) is intensifying merger talks with US Airways Group Inc. (NYSE: LCC), according to The Wall Street Journal. A deal is said could emerge in as soon as 10 days. In light of rising fuel costs, the more than $1.5 billion in potential cost savings and revenue enhancements the companies see from joining forces is no doubt appealing more and more.
Hovnanian Enterprises (NYSE: HOV) is a major U.S. homebuilder. The firm designs and constructs single-family detached homes, attached townhomes and condominiums, mid-rise and high-rise condominiums, urban infill, and active adult homes. It targets first-time buyers, move-up buyers, luxury buyers, active adult buyers, and empty nesters. The company operates in 19 states, primarily along the East Coast and in the Midwest, California, and Texas. Hovnanian also offers mortgage financing and title services.
Investors were relieved last month, when the company reported a Q1 loss of $2.07 per share and revenues of $1.09 billion. On average, the Street had been looking for a loss of $1.96 per share and revenues of $911.4 million. Management admitted that the housing market remains challenging, but it continued to project positive cash flow from operations in excess of $100 million for FY08. Fitch Ratings subsequently upgraded its view of the homebuilder's revolving credit facility, saying the recovery prospects were "outstanding." The change to "BB-/RR1" from "B-/RR4" came, after Hovnanian reduced its credit facility from $1.2 billion to $900 million.
Stock futures were barely on the positive side morning, indicating stocks could have a sluggish open as investors' concerns over the economy and the weak dollar linger and after overseas markets declined.
On Friday, to wrap up a week where U.S. markets declined considerably, stocks sold off again following news that the U.S. economy lost 63,000 jobs in February, the largest drop since March 2003. The Dow industrials lost 146 points, or 1.22%, the S&P 500 declined 10 points, or 0.84%, and the Nasdaq Composite fell 8 points, or 0.36%. For the week, the S&P 500 declined 2.8% and the Nasdaq Composite lost 2.6%.
At 10 a.m. EDT, January wholesale inventories is due for release. This week will be full of economic releases investors will focus on including retail sales, consumer sentiment and CPI. While it seems lately that the economic slowdown has taken a precedence over inflation, at least where the Federal Reserve is concerned, the news will likely still impact markets significantly. This would be shown well this week when retail sales are expected to have gained a paltry 0.1% in February, while inflation continues its over 4% annual rate.
But since the Fed is expected to weigh in economic activity more when it makes its policy decision next week, especially after the jobs report, many believe it would cut rates again, some even say by at least 75 basis points. Consequently, the dollar, directly affected by interest rates, has further weakened against the euro and approached an eight-year low versus the yen.
Everywhere I go in the suburban wonderland where I live there seems to be a new housing development. When I visited my brother- and sister-in-law in a neighboring town, I must have passed seven of them. Apparently, word of the housing slowdown has not reached Burlington County, New Jersey.
While the earnings crunch for this quarter is all but over, there is still plenty of action in the earnings arena this coming week. For instance, analysts surveyed by Thomson Financial are expecting 
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Despite the fact that the challenging housing conditions are still persisting, it looks like that some major housing companies are poised to see the light at the end of tunnel. SmartMoney 
Stock futures were barely on the positive side morning, indicating stocks could have a sluggish open as investors' concerns over the economy and the weak dollar linger and after overseas markets declined.
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