TheStreet.com's Jim Cramer says the scope of this crisis needs to be recognized.
The real deal is upon us. The October session that we always seem to get, the one that looks like we need intraday Fed meetings and lifelines to banks and a flood of liquidity and ... oops, we've already done that!
Yep. So often we have had the real hideous looks, only at the last minute to have the darned defeat we need to start over be defeated by some optimistic yahoos who come out of the woodwork and say, "buy, buy, buy!"
I don't want it to happen this time. We have to have some recognition that Ford (NYSE: F) (Cramer's Take) and GM (NYSE: GM) (Cramer's Take) and Chrysler matter and that they are all teetering, that the Boeing (NYSE: BA) (Cramer's Take) strike is going to soon shut down the part of American manufacturing that is not auto and that housing took a step down last month of unfathomable proportions. If you don't believe me, go read the Ryland (NYSE: RYL) (Cramer's Take) release: cancellations spiked up again! We will not hold those July lows that now make the HGX housing sector index run up look like a total ploy to make us feel better. When are Horton (NYSE: DHI) (Cramer's Take) and Pulte (NYSE: PHM) (Cramer's Take) going to merge anyway!
MOST NOTEWORTHY: BP Plc, Tenet Healthcare Franklin Resources were today's noteworthy upgrades:
Lehman upgraded shares of BP Plc (NYSE:BP) to Equal Weight from Underweight on valuation and positive benefits from the company's TNK joint venture in Russia.
Lehman also upgraded Tenet Healthcare (NYSE:THC) to Overweight from Equal Weight, citing increased confidence the company can meet guidance following the company's analyst day.
Keefe Bruyette upgraded shares of Franklin Resources (NYSE:BEN) to Outperform from Market Perform as they believe flow trends have improved.
OTHER UPGRADES:
Goldman added Allied Waste (NYSE:AW) to its Conviction Buy List.
MOST NOTEWORTHY: Suntech Power, Premier Exhibitions and the Homebuilders Sector were today's noteworthy initiations:
Citigroup named Suntech Power Holding (NYSE: STP) their top pick for China solar due to its leading scale and technology roadmap for higher cell efficiency, initiating shares with a Buy rating and $55 target.
Merriman believes Premier Exhibitions (NASDAQ: PRXI) can move to the $14.50-$17.00 through the continued monetization of the company's current tours, the launching of additional tours and the value of the Titanic artifacts on hand. The firm started shares with a Buy rating.
Have home builders got an offer for you: sign a contract to buy a home and, if comparable homes in the area decline in value before closing, you can have the home at a reduced price.
According (subscription required) to the Wall Street Journal, companies including KB Home (NYSE: KBH) and Ryland Group (NYSE: RYL) hope such "price protection" guarantees will lessen consumers' paralyzing fears about buying real estate whose value is falling and get them sign on the dotted line, bring in much-needed cash and reduce high cancellation rates.
KB will roll out its price protection program in 35 markets this month. The move is an effort to move some impossible-to-sell new houses, and try to toss buyers a bone that will keep them from walking away from their down payments.
As an investor, I wonder whether this a sign of absolute desperation on the part of home builders, or is it a more bullish indicator that executives don't feel there's much risk in assuaging customers' fears with an offer to compensate them if the home declines in value before closing.
TheStreet.com's Jim Cramer says until the public feels they won't lose money on a home, no problems will get solved.
Would you ever buy a house in this environment? That's really the ultimate question that has to be asked -- that the Fed should be asking -- if this junk is ever going to come back to life.
I know some of it is so short-term that the jury's back and the verdict is guilty, but most of it hinges on a simple issue: housing depreciation. If you think that your house is going to lose value, default on the second home lien. Which then, we know now, means defaulting on the ultimate mortgage.
The Fed can tinker with LIBOR (I still can't believe they wasted the banking system's time with the LIBOR/auction plan). It can issue statements that are a little more pro-growth than neutral.
Or it can try to change the psychology of the home buyer and homeowner.
The Ryland Group Inc (NYSE: RYL), the California-based homebuilder, released preliminary results last night. What continues to be most striking about homebuilder results is the magnitude of cancellations, suggesting either how widespread speculation was or how difficult it is for new homebuyers to get financing.
Cancellations were approximately 34 percent of gross orders for the quarter, compared to 35.9 percent in the second quarter 2006. Preliminary closings totaled 2,461 units in the period, compared to 3,803 units in the second quarter of 2006, a decline of 35.3 percent.
These are simply huge numbers. Add to this the shakeout that continues to unfold in the mortgage market as hedge fund and investment firms have to mark their portfolios to market for less liquid holdings, suggesting the housing and mortgage market still have a long way to go before the industry's problems are behind them.
KB Home: The company reported a second quarter loss and sales hit three-year lows. The loss was partly due to land value-related charges that highlighted the continued decay of the U.S. housing market. The company also said it was unable to provide investors with a full-year earnings forecast and couldn't say when they thought conditions would improve.
Lennar: Reported a Q2 loss. The company said market conditions had eroded so much that it's not trying to limit its losses for the year.
Pulte Homes: In response to the "challenging operating environment that continues to exist in the U.S. homebuilding industry," the company announced a restructuring plan designed to reduce costs and improve operating efficiencies in May.
Get the picture? Here's one more:
Ryland Group: Reported a Q1 loss in April and said it wouldn't be able to provide new guidance due to the slump in the housing market.
See a pattern? Homebuilder after homebuilder, it's the same story -- company faces challenging housing market, company loses money, tries to regain profitability. You'd think Citigroup would have noticed.
Aside from the companies themselves, other firms and analysts have said their piece about the sector. March data showed sales of existing homes fell to a four-year low. In April, Census Bureau data showed there were 2.5 million vacant non-seasonal housing units for sale, way over many firms' predictions. Additionally, AG Edwards said on April 30th that "it is not a good time to buy shares yet." Standard & Poor's said in May that they believed over a third of all U.S. homebuilders were "vulnerable to rating downgrades" in the midst of a "three-year downturn."
MOST NOTEWORTHY: Genesit Energy LP (GEL), EnerNoc (ENOC) and Comcast (CMCSA) were today's noteworthy initiations:
Genesis Energy (AMEX: GEL) was initiated with a Buy rating and $40 target at Stanford, as the firm believes the company's affiliation with Denbury Resources and pending acquisition of petroleum products, terminals, and transportation businesses from the Davison family will drive rapid growth.
EnerNoc Inc (NASDAQ: ENOC) was initiated with a Hold rating and $42 target at Jefferies, due to valuation. EnerNoc was also initiated at Morgan Stanley with an Equal Weight rating and $40 target.
Stifel expects Comcast (OTC: CMCSA) to benefit from higher penetration levels of DVR and HDTV set-top boxes over the next several years and initiated shares with a Buy rating and $34 target.
OTHER INITIATIONS:
Select asset managers were initiated at Credit Suisse:
Deutsche Bank initiated Ryland Group (NYSE: RYL) with a Buy rating and $52 target, as well as Pulte Homes (NYSE: PHM) and Meritage Homes Corp (NYSE: MTH) with Hold ratings and a $23 target and $29 target, respectively.
Elsewhere, Garmin Ltd (NASDAQ: GRMN) was initiated with a Sector Outperformer at CIBC with a $67 target.
Thomas Weisel started Force Protection Inc (NASDAQ: FRPT) with an Overweight rating, as the firm believes the mine-resistant vehicle market is real and has staying power.
Clearwire Corp (NASDAQ: CLWR) was the most favored initiation today, with coverage started in at least nine firms: Merril, ThinkEquity, Jefferies and Stifel all started Clearwire with a Buy rating, Morgan Stanley and JP Morgan started it with an Overweight rating, Raymond James and Wachovia started it with an Outperform rating and Bear Stearns started shares of Clearwire with a Peer Perform rating.
Credit Suisse started Healthways, Inc (NASDAQ: HWAY) with an Outperform rating and $60 target.
Caris initiated Circuit City Stores, Inc (NYSE: CC) with an Average rating, as the firm believes Circuit City is still playing catch-up in the customer centered approach and services venues, and notes shares trade at premium earnings ratios to Best Buy Co, Inc (NYSE: BBY).
MOST NOTEWORTHY: Today's noteworthy upgrades include ConAgra Foods, Inc (CAG), Dell Inc (DELL), Ryland Group, Inc (RYL) and Volterra Semiconductor Corp (VLTR).
Prudential upgraded shares of ConAgra Foods Inc (NYSE: CAG) to Neutral from Underweight with a $26 target on valuation.
Pacific Crest upgraded shares of Dell Inc (NASDAQ: DELL) to Outperform from Sector Perform as the firm believes new management, new products and supply chain cost realignments could boost operating margins.
Ryland Group, Inc (NYSE: RYL) was upgraded to Neutral from Underperform at Credit Suisse.
Unterberg upgraded shares of Volterra Semiconductor (NASDAQ: VLTR) to Market Perform from Underperform on valuation.
OTHER UPGRADES:
Friedman Billings upgraded Peabody Energy Corp (NYSE: BTU) to Outperform from Market Perform based on lack of CAPP exposure, growth profile, rising international demand and certain benefits from the scrubber trend.
JP Morgan upgraded shares of Cincinnati Bell Inc (NYSE: CBB) to Overweight from Neutral, as the firm believes higher capex is reflected in the valuation and FCF should recover in 2008.
Brean Murray has increased confidence in the success of Isle of Capri Casinos' (NASDAQ: ISLE) Isle casino, soon to open at Pompapno Park, and the considerable option value that should be embedded in shares related to a Florida gaming bill which would loosen restrictions on gaming at pari-mutual facilities. The firm upgraded shares to Buy from Hold on the news.
Deutsche Bank upgraded shares of Pogo Producing Co (NYSE: PPP) to Hold from Sell to reflect the likelihood of corporate action over the near term, most likely the sale of the company in whole or in parts.
Yesterday was definitely a tough day for home builders following disappointing news on new homes sales in February. The tone for home builders is going to be rough again today following this morning's earnings release from Lennar Corp. (NYSE: LEN).
It really comes as no surprise that the nation's third largest home builder put up weaker than expected earnings this morning. The subprime mortgage crisis that the market has been struggling with the last month definitely took its toll on the company and according to LEN, the trouble is not nearing an end just yet.
Lennar hit the housing market with a one-two punch today by not only missing analysts' estimates but also forecasting lower 2007 earnings. Analysts had expected to see the company report $0.55 per share for its fiscal first quarter. The home builder came in well shy of that estimate at $0.43 per share with a quarterly profit that fell over 70%. Revenue saw a 14% drop to $2.8 billion and the company saw a decline 27% draw in new homes orders.
The Wall Street Journal (subscription required) speculated that Carl Icahn's bid for WCI Communities Inc (NYSE: WCI) may be the start of home-builder buyouts. Other possible LBO targets, according to some Wall Street firms, include Toll Brothers Inc (NYSE: TOL), Ryland Group Inc (NYSE: RYL), Beazer Homes USA Inc (NYSE: BZH) and KB Home (NYSE: KBH).
The Wall Street Journal also reported that Goldman Sachs Group Inc (NYSE: GS) is looking to push deeper into the subprime lending business at a time when the subprime mortgage market is suffering a "meltdown."
The Financial Times (subscription required) reported that Cerberus Capital Management, one of the leaders in the bid to buy DaimlerChrysler AG's (NYSE: DCX) Chrysler unit, has signed Wolfgang Bernhard to an advisory contract. Bernhard helped restructure Chrysler five years ago.
OTHER PAPERS:
The U.K. Times reported that a CVC-led private equity group is planning to bid above GBP9.5B for Sainsbury's plc ADR (OTC: JSAIY).
The U.K. Times also reported that Cadbury Schweppes ADS (NYSE: CSG) is considering spinning off and selling its profitable drinks business, which includes Dr. Pepper and 7-Up, as a way to defend against a takeover bid for the entire group.
Ben Berkowitz is the business news editor at AOL. His weekly column highlights business stories with significant implications that were overlooked at first glance.
The story you didn't read this week but should have is that Bill Gates is heading for the exit on housing and energy stocks. When the world's richest man, who certainly has money to burn, says "nah, no thanks" to an entire sector, pay heed.
Gates sold out of a laundry list of stocks: KB Home (NYSE:KBH), Centex Crop. (NYSE:CTX), Pulte Homes, Inc. (NYSE:PHM), Lennar Corp. (NYSE:LEN), Beazer Homes USA, Inc. (NYSE:BZH), Ryland Group Inc. (NYSE:RYL) and WCI Communities, Inc. (NYSE:WCI) in the housing space; and AES Corp. (NYSE:AES), Chevron Corp. (NYSE:CVX), Consolidated Edison, Inc. (NYSE:ED), Dominion Resources, Inc. (NYSE:D), Duke Energy Corp. (NYSE:DUK), FPL Group, Inc. (NYSE:FPL) and Ameren Corp. (NYSE:AEE) in energy and utilities.
His move in housing was particularly striking - a November filing by his foundation showed new positions in a number of home builders, only to then sell the shares by Dec. 31.
Could it be that the housing market is just so lousy that Gates does not feel compelled to bother? This is a man who is so rich that, if he sold off everything he owned, he could give every man, woman and child in the United States something like $160 and still have plenty of money left over for the Egg McMuffins he was once known to favor.
MOST NOTEWORTHY: Under Armor Inc (NYSE: UA) and Cardinal Health Inc (NYSE: CAH) are today's most notable upgrades:
Credit Suisse upgraded Under Armor Inc (NYSE: UA) to Outperform from Neutral with a $65 target and believes that the company is emerging as one of the premier global athletic brands.
JMP Securities upgraded shares of Cardinal Health Inc (NYSE: CAH) to Outperform from Market Perform to reflect their expectation for accelerated earnings growth over the next three years.
OTHER UPGRADES:
Friedman, Billings upgraded shares of Urban Outfitters Inc (NASDAQ: URBN) to Outperform from Market Perform to reflect positive momentum in URBN's core division, inventory control and easy upcoming comps.
Stanford upgraded shares of Vonage Holdings (NYSE: VG) to Hold from Sell on valuation.
Goldman Sachs upgraded the US Homebuilding Sector to Neutral from Sell saying the worst may be behind the group, but fundamentals remain troubling. The analyst said the next meaningful data will be from the Spring selling season, 6-8 weeks away.
Goldman upgraded D.R. Horton Inc (NYSE: DHI), MDC Holdings Inc (NYSE: MDC) & Toll Brothers Inc (NYSE: TOL) to Buy from Neutral due to lower-risk at this point in the cycle. The Ryland Group Inc (NYSE: RYL) was upgraded to Neutral from Sell.
Each year Steven Halpern, editor of TheStockAdvisors.com, surveys the leading financial newsletter advisors asking for their favorite stocks for the coming year. This article is part of his 24th annual Top Picks Report.
Ryland GroupInc. (NYSE: RYL) is the favorite conservative pick from John Stewart, editor of The Leverage Alert. He notes, "The company, which builds homes and finances mortgages, is seeing its stock start to display positive price action, although many experts are calling for a broader and deeper housing correction.
"Much of the doom and gloom toward the sector seems to have already been priced into these housing stocks as even negative news seems to be shrugged off. RYL's technical picture now looks quite strong as it is trading well above key moving averages, such as its 80-day. Meanwhile, shorter-term moving averages such as its 10-day trendline have provided support for the security during its recent run higher.
"Despite the stock's strength, ample skepticism exists from the Street. Ample pessimism is evident in our quantitative sentiment indicators as well. Options players are quite heavily skewed toward the bearish side of the spectrum.
"A number of traders are betting against the stock by shorting the shares as well. The total number of shares sold short amounts to nearly 20% of the stock's float. As the shares continue their advance, these short sellers may be forced to buy back their pessimistic positions. This could further exacerbate the magnitude of the homebuilder's upside potential as the bears unwind their short positions."
To see John's top speculative pick for 2007, click here.
TheStreet.com's Jim Cramer says the scope of this crisis needs to be recognized. .gif){kind=logo}
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Have home builders got an offer for you: sign a contract to buy a home and, if comparable homes in the area decline in value before closing, you can have the home at a reduced price.
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