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.)
MOST NOTEWORTHY: CBS Corp., Thornburg Mortgage and DiamondRock Hospitality were among today's noteworthy downgrades:
CBS Corp. (NYSE: CBS) was downgraded to Market Perform from Outperform at Wachovia, citing the weak ad environment and potential M&A strategy to acquire growth, which will limit upside near-term.
Thornburg Mortgage (NYSE: TMA) was downgraded to Underperform from Outperform at Friedman Billings, which said the recent capital raise and related transactions result in 95% dilution, and questions how shares will trade when 2.9B restricted common shares are registered and start trading in mid- May.
DiamondRock Hospitality (NYSE: DRH) was downgraded to Neutral from Outperform at Baird following the company's reduced guidance.
OTHER DOWNGRADES:
Savvis Inc. (NASDAQ: SVVS) was downgraded to Equal Weight from Overweight at Lehman following the company's Q1 report and guidance.
Memc Electronic Materials (NYSE: WFR) was downgraded to Neutral from Overweight at J.P. Morgan, who cited high Street expectations and a very tight capacity expansion schedule over the next few quarters.
TheStreet.com's Jim Cramer says the latest proposal leans on private industry and the states, two groups that already failed.
"The plan, which relies primarily on state regulators and private industry to tighten their oversight of financial markets, calls on states to issue nationwide licensing standards for mortgage brokers."
That quote, from the lead story in The New York Times, headed "White House Offers Plan to Ward off Credit Crisis," is exactly what is wrong with every response from this government to the crisis we are in.
First, the state regulators are a joke, have been a joke and always will be a joke. We have had state regulators, some of them actually attempting to be good at their jobs, but this real estate industry is always more powerful than state government, so it is a hopeless proposition. All of the problems in this business may have started with mortgage brokers putting people into mortgages that they shouldn't have, but that would have simply stopped had the Federal Reserve said that it didn't see the wisdom in 2 and 28 loans. They pushed them, didn't believe in derivative packaging, and thought that loans should be kept on the books of the banks UNLESS bought by Fannie Mae (NYSE: FNM) (Cramer's Take).
The stock market was up earlier today on hopes of a continue follow-on from yesterday's monster gains, but closed weak at the end of the day. The good news is that we didn't give back most of yesterday's gains. The bad news is that bears can claim there isn't enough positive mojo to keep the market surging a second day. That's what makes a ballgame. Seeing oil hit $110 per barrel probably didn't help matters for those hoping for an ease in gas prices and a break for retail. Below are the unofficial market closing levels:
Southwest Air (NYSE: LUV) was one of the standout stocks with a 7% price drop down to $11.49 after it grounded 41 planes and canceled flights. The airline will recover from this incident, but what is odd is that if you look it up and down it isn't rewarding shareholders even when it cheats.
Humana Inc. (NYSE: HUM) was the news disaster of the day for large cap stocks with a 13.7% drop to $40.88 after noting higher pharmacy charges were going to nearly chop first quarter earnings in half. The stock put in another 52-week low under the $42.85 prior low despite a Merrill Lynch upgrade late in the day defending the stock.
A biotech called Progenics Pharmaceuticals, Inc. (NASDAQ: PGNX) acted as the biotech implosion of the day with a monster drop of 63% to $5.31 (close to perceived cash balance) after its bowel drug failed in Phase II tests. It looks like the placebo was even better.
Thornburg Mortgage (NYSE: TMA) was the monster gainer today with shares up 82% to $2.86, after its coverage was raised to Peer Perform at Bear Stearns. KLA-Tencor (NASDAQ: KLAC) saw shares fall more than 9% to $37.80 on a downgrade today. (Top 10 pre-market calls).
Tomorrow we have the weekly jobless claims, and while weekly numbers are less watched they may be more front and center as everyone is hoping the job market doesn't head as far south as the economy. We also have February import prices, so we'll get to see more evidence of the inflation we know is there.
MOST NOTEWORTHY: Nokia, Thornburg Mortgage and AbitibiBowater were today's noteworthy upgrades:
Oppenheimer upgraded shares of Nokia (NYSE: NOK) to Outperform from Perform on valuation following the recent weakness, as their checks indicate demand remains solid. WestLB raised Nokia to Buy from Add on valuation, as they believe concerns about Chinese demand are overdone.
Bear believes Thornburg Mortgage (NYSE: TMA) is much more likely to survive given liquidity from the Fed's Term Securities Lending Facility. Bear upgraded Thornburg to Peer Perform from Underperform.
BMO Capital upgraded AbitibiBowater (NYSE: ABH) to Market Perform from Underperform citing the company's $496M private debt exchange offer.
OTHER UPGRADES:
JMP raised Cash America (NYSE: CSH) to Outperform from Market Perform.
MOST NOTEWORTHY: Thornburg Mortgage, Keryx Biopharma and Aeropostale were today's noteworthy downgrades:
Jefferies downgraded shares of Thornburg Mortgage (NYSE: TMA) to Underperform from Hold after the company said it is unable to meet margin calls despite asset sales and will restate 2007 earnings.
Keryx Biopharma (NASDAQ: KERX) was downgraded to Neutral from Buy at Merrill, to Neutral from Overweight at JP Morgan, to Underperform from Market Perform at Rodman & Renshaw, to Hold from Buy at Jefferies and to Underperform from Outperform at Bear Stearns after the company announced the Sulonex SUN-MICRO Phase 3 trial failed to meet the primary endpoint.
Citigroup lowered Aeropostale (NYSE: ARO) to Sell from Hold as they believe inventory levels are building and that there is downside risk to Q1 estimates.
MOST NOTEWORTHY: Thornburg Mortgage, Whirlpool and Jackson Hewitt were today's noteworthy downgrades:
Jefferies downgraded shares of Thornburg Mortgage (NYSE: TMA) to Hold from Buy to reflect the ongoing dislocation of the mortgage markets and lowered their target to $3.75 from $14. While they believe Thornburg will probably survive its current liquidity crisis, they think the company's capital structure will be impaired further.
JP Morgan downgraded Whirlpool (NYSE: WHR) to Underweight from Neutral, citing valuation, higher steel prices, the difficult macro environment and competition.
Stephens cut Jackson Hewitt (NYSE: JTX) to Equal Weight from Overweight to reflect the company's recent results and concerns over the issues that have impacted the basic business.
TheStreet.com's Jim Cramer says Pennsylvania's foreclosures are declining, thanks to a plan that can be applied nationally.
We keep hearing how the AAA paper is unfairly being marked down because of the "need" to sell. We hear that if the paper, particularly the mortgage paper, were allowed to be held, there would be no problem, that, for example, the Thornburg (NYSE: TMA) (Cramer's Take) paper, which is most likely not going to default, or the paper that AIG (NYSE: AIG) (Cramer's Take) is insuring, the so-called super senior, which is also most likely not going to default. We keep believing that the real issue is the markings, and how the markings reflect unrealistically depressed valuations.
Obviously the Fed believes this, too or it wouldn't have been so complacent. So why doesn't the Fed puts its money where its mouth is, and do something, non-bailoutish, that exploits the market's imperfection. Why doesn't it issue $50 billion of two-year notes at 1.60% and take the money and buy high quality mortgages and other collateralized obligations, the very stuff that everyone says will pay off over time. Then the Fed can make money holding the stuff, the banks get more liquid, which takes the pressure off their balance sheets, and no bailout occurs?
TheStreet.com's Jim Cramer says indifference and inaction by our pols is just begging for foreign intervention to bail us out.
Where's our sovereign fund? We are spending all of our time hoping to be bailed out by countries where we would just as soon overthrow in the old days as we would now fall in love with, and in the meantime we have nothing from our own country. If Merrill Lynch (NYSE: MER) (Cramer's Take) is such a great buy for some other country, could it be a great buy for us?
Don't you think our sovereign fund could have taken a stake in MBIA (NYSE: MBI) (Cramer's Take) and Ambac (NYSE: ABK) (Cramer's Take) and gotten rid of the whole muni problem? How about a sovereign fund putting up capital behind the FHA so that stretched people can get a 30-year-fixed at prices they can pay, in return for getting free from some sort of rapacious adjusted-rate post-teaser, knowing that if it weren't adjusted higher, the person would be a good credit because he or she lives in the house?
So what if they paid more than the house is now worth; they would pay if they could. Nobody likes to be thrown out of their house -- they just can't take the resets.
Thornburg Mortgage (NYSE: TMA) said that since Feb. 14 it has met margin calls in excess of $300 million related to securities backed by about $2.9 billion of mortgage debt.
TMA, a single-family residential mortgage lender, is recently at $8.60 in pre-open trading, below its close of $11.54 Wednesday.
TMA March call option implied volatility is at 53, puts are at 60. TMA 26-week average of option implied volatility is 64 according to Track Data, suggesting less price risk. TMA puts are bid higher than calls on TMA being difficult to borrow.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
TheStreet.com's Jim Cramer says the bad news should make sure the Fed keeps cutting.
We haven't broken the spiral yet. The waves off of homes just keep fighting new areas to hurt, new municipal projects to ding, new large jobs numbers lost, new margin calls for places like Thornburg (NYSE: TMA) (Cramer's Take), which I thought was out of the woods.
Then I saw the TMA news and the verbiage that there was another problem in the markets in February that will require margin calls. This is the Alt-A culprit, the hard-to-value loans given to people who look likely to return the money because they have good solo jobs but on paper haven't been performing. TMA has a ton of jumbo loans to these people. Only back-from-the-grave Indymac (NYSE: IMB) (Cramer's Take) is worse.
Truth be told, we know these are all momentary issues. No bank seems willing to let anyone fail here, and neither TMA nor IMB will be so hurt by these new issues that they can crush the market. Same as Fannie Mae (NYSE: FNM) (Cramer's Take) yesterday -- staggering losses, but so what?
MOST NOTEWORTHY: Merck, the European semiconductor sector, Thornburg Mortgage and Prudential were today's notable upgrades:
Merck & Co Inc (NYSE: MRK) was upgraded to Buy from Neutral by Bank of America, which believes the company's sales momentum will continue.
The European semiconductor sector, which includes Infineon Technologies AG (NYSE: IFX) was upgraded to Positive from Neutral by Lehman Brothers, as they believe a recovery is under way in the industry. The firm upgraded Infineon to Equal Weight from Underweight.
Thornburg Mortgage Inc (NYSE: TMA) was upgraded to Market Perform from Underperform at Piper, as they see limited liquidity risks, given the strong quality of the company's mortgage assets.
Prudential Financial Inc (NYSE: PRU) was upgraded to Outperform from Neutral by Friedman Billings, which cited valuation and the quality of the company's investment portfolio.
MOST NOTEWORTHY: The U.S. beverage sector, ImClone, Starwood Hotels and Marriott International were today's noteworthy upgrades:
Goldman Sachs upgraded the U.S. beverage sector, including Coca-Cola (NYSE: KO), Molson Coors Brewing Company (NYSE: TAP), Anheuser Busch Companies (NYSE: BUD), PepsiAmericas Inc (NYSE: PAS) and Coca-Cola Enterprises (NYSE: CCE) to Attractive from Neutral. The firm cited expectations for a stronger 2008, benign commodity cost outlook, better than expected US beer demand, and valuations. Goldman upgraded shares of PepsiCo Inc (NYSE: PEP) to Buy from Neutral citing valuation and improving industry fundamentals.
Bear Stearns upgraded ImClone (NASDAQ: IMCL) to Outperform from Peer Perform citing positive Flex trial results and the new market opportunity for Erbitux.
Thomas Weisel upgraded Starwood Hotels (NYSE: HOT) and Marriott International (NYSE: MAR) to Market Weight from Underweight based on healthy August trends, credit market may ease concerns over supply growth, and valuations.
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