Earlier this week, Jim Cramer pondered whether the U.S. economy had reached bottom, given such recent signs as stronger-than-expected retail sales and investor interest in homebuilders. In particular, he said he's looking at next week's quarterly results from Lowe's (NYSE: LOW) and Home Depot (NYSE: HD) as a sign for the housing sector and for the potential market rally.
Lowe's is expected by analysts surveyed by Thomson Financial to report second-quarter earnings of 39 cents per share, down 18.8% from 48 cents per share in the same period in 2007, but up 28.2% from 28 cents per share in the previous quarter. The company has provided positive surprises in four of the past five quarters.
North Carolina-based Lowe's is the second-largest U.S. home improvement chain, behind rival Home Depot, and the second-largest appliance retailer after Sears (NYSE: SHLD). In the past year, the company's revenues were $48.2 billion and its net income totaled $2.8 billion. Its long-term EPS growth forecast is 12.7%, which is better than its industry average. The consensus recommendation of analysts remains to buy Lowe's.
The stock is up 9.9% since the beginning of the year, but has fallen 20.5% from a year ago. It trades at a P/E ratio of 13.38. Shares closed Friday at $24.89.
Executive compensation gone wild is a major pet peeve of mine. And if seven-figure pay packages plus restricted stock and options and country club memberships aren't bad enough, some executives are now sticking their companies with the losses on homes they bought.
Here's how it works: A company wants to hire a new CEO but she'll have to relocate to take the job. So the company agrees to make up any loss on the sale of the house. In this real estate market, that's becoming more of an issue. Qwest (NYSE: Q) lost $1.8 million on Edward Mueller's old house.
Part of me doesn't think this is such a big deal. If that's what it takes to recruit the executive, and the board is aware of the potential liability, it isn't really any different from a higher salary. Recent SEC rules that require companies to provide a summary compensation table showing the total value of the top officers' pay packages including all perks make this less of an issue.
Of course, some pay critics are using this as an opportunity to jump on the greed of executives and the supine nature of corporate directors. But the focus should remain on corporate governance and the fact that executive pay is too often completely unrelated to performance. Issues like relocation benefits make for good stories, but they're really not the issue.
After hitting a one-year high of $33.19 in June, the stock hit a one-year low of $19.94 in January. This morning, LOW opened at $25.22. So far today the stock has hit a low of $24.51 and a high of $25.24. As of 11:45, LOW is trading at $24.83, down 31 cents(-1.2%). The chart for LOW looks bullish but deteriorating, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bearish hedged play on this stock, I would consider a June bear-call credit spread above the $27.50 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in five weeks as long as LOW is below $27.50 at June expiration. Lowe's would have to rise by more than 10% before we would start to lose money. Learn more about this type of trade here.
LOW hasn't been above $27.50 since October and has shown resistance around $26 recently. This trade could be risky if the company's earnings (due out on 5/19) are a positive surprise, but even if that happens, this position could be protected by resistance LOW might find at its 200 day moving average, which is currently around $26 and falling. Brent Archer is an options analyst and writer at Investor's Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in LOW.
U.S. consumer confidence in May 2008 plunged to its lowest level in almost 28 years, an indication American adults are very concerned about the near-term health of the U.S. economy as it slides into its first recession in six years.
It was the index's lowest reading since June 1980 -- a period also characterized by high oil/gasoline prices and a sluggish U.S. economy.
Economists surveyed by Bloomberg News had predicted that the April 2008 index would fall to 62.5. The index stood at 63.2 in April 2008 and 69.5 in March 2008.
'An awful number'
Economist Peter Dawson told BloggingStocks Friday May's consumer sentiment reading reflects conditions on the ground. "It's an awful number, but it reflects conditions on Main Street, as the typical person experiences them," Dawson said. "We've got falling home prices, record-high gas prices, rising food prices, property taxes increasing in many areas, and no job growth. It's not a happy time for Americans right now and the University of Michigan sentiment numbers reflect that."
U.S. housing starts increased 8.2% in April 2008 -- an upside surprise skewed by a 36% rise in multi-family unit construction. Housing starts totaled a 1.032 million annual rate in April 2008, the U.S. Commerce Department announced (pdf) Friday.
Economists surveyed by Bloomberg News had expected housing starts to total a 940,000 annualized rate in April 2008.
Still, housing starts are down 31% in the past year and single-family starts are down 42%, the largest decline for single-family starts since 1992.
Meanwhile, building permits, a measure of future construction, increased 4.9% to a 978,000 annualized rate in April 2008; single-family permits increased 4% and multi-family permits climbed 6.8% during the month.
The U.S. housing slump is creating another negative ripple effect, this one by extension, or by association, if you will, as in condo/co-op association.
Owners in condo associations are having to chip-in to pay for unexpected association maintenance, tax, and related fees when other residents enter foreclosure or are substantially behind in payments, The New York Times reported Thursday.
The Times cited the case of condo owners in a 43-story Miami, Florida condo having to ante up more money after 1 in 6 residents battled foreclosure. The additional charge: an additional $1,000 assessment and $50 more a month for cable and internet fees, on top of the regular $450 monthly maintenance.
Connecticut-based appraiser Lawrence Schmidt, not a realtor but a former 15-year condominium owner with extensive knowledge of the sector, told BloggingStocks Thursday prospective buyers need to fully-research a condo association's membership status, including record of tax payments of individual members, in addition to the standard evaluation of the condo association's maintenance fees, contractor services, and quality-of-life issues, etc. Co-op buyers must do even more research on the co-op's balance sheet, monthly budget, cash flow, outstanding mortgage, and other related financials, he said.
Despite the weak housing market, not everyone is feeling the pain, including Donald Trump who recently made a killing selling a home in Palm Beach for a reported $100 million.
While Trump concedes that the housing market is still weak, he states that he thinks things are about to turn a corner. Trump said that what is most troublesome to him right now is that people are still pretty shy about investing in America, and is what he calls the "saddest part" of all concerning the current economic situation in the country.
Since the American economy is driven so much on oil, Trump admits that there are better investments that you can make by looking abroad.
Alan Greenspan now says that the U.S. could face a mild recession. Mild? He may be blinded by all the millions of dollars he is earning on his new book. Reuters quotes him as saying, "When home prices stabilize that would mark the end of the credit crisis." Greenspan seems to think housing prices could stabilize before 2009.
He has obviously not bought or sold a home recently. Data from the real estate industry show that prices are still dropping in most cities and states. The housing downturn may be prolonged by the fact that each foreclosure tends to drive down the value of homes near the house being auctioned by the bank. No wonder, since these properties often go for cents on a dollar.
Many industry experts expect that as more subprime ARMs reset this summer default rates will actually go higher. Although the Administration and Congress have talked about a comprehensive national plan to help homeowners, the only legislation is too narrow to stanch most problems for people who cannot make house payments.
Perhaps the largest issue of all is that most homeowners cannot get refinancing or new mortgages. Banks are taking in cheap money from the Fed, but are using it to improve balance sheets instead of passing it on to consumers in the form of lower interest rates.
The median price fell 7.7% to $196,300 in Q1 2008 down from $212,600 for the same period a year ago, the NAR said. It was the largest year-over-year decline since the NAR started keeping comprehensive records of median home prices in 1979.
Median prices declined 12.3% in the West, 7.9% in the Midwest, 7.5% in the South, and 3.32% in the Northeast.
U.K. home repossession claims by mortgage lenders increased 16% from a year ago to their highest level since the early 1990s, Bloomberg News reported Friday.
The U.K.'s Ministry of Justice said possession claims, the first step in the foreclosure process, increased to 38,688 in Q1 2008, from 27,530 in Q1 2007, Bloomberg News reported. Anglo-American housing slump
London-based economist Mark Chandler told BloggingStocks Friday the large foreclosure rise indicates that the air is easing out of the housing balloon, and that the housing correction that began in the United States, is "clearly washing shore in the U.K."
The European Central Bank and the Bank of England Thursday each kept their key, short-term interest rates the same, at 4% and 5%, respectively, the banks announced. Economists surveyed by Bloomberg News had expected both the ECB and BOE to maintain current interest rate levels.
In its previous meeting, the ECB had kept its benchmark interest the same at 4%; meanwhile, the BOE lowered its key rate by 25 basis points to 5% from 5.25% on 10 April 2008.
In contrast, the U.S. Federal Reserve has lowered its key, short-term interest rate five times, or by 325 basis points, to 2% from 5.25%, as it attempts to jump-start a U.S. economy dragged to near-stall levels by its worst housing slump in a generation.
Further, for at least the time being, the ECB and BOE do not appear to be concerned about the euro's and the pound's steady, two-year rise versus the dollar. The euro traded at $1.5383 and the pound at $1.9583 in Thursday morning trading; each is about 4% off its 2008 highs.
Readers of this space know that my investment bias is toward large-cap companies with demonstrated business models that have a competitive advantage in established markets, preferably with a favorable global trend as a support. And with the aforementioned in mind, Caterpillar is worth a review.
Caterpillar (NYSE: CAT) is the world's No. 1 manufacturer in earth moving equipment and a leader in construction/agricultural equipment.
In general, analysts see CAT's 2008 revenue increasing 7-10% on strong international growth; North American revenue is expected to be flat.
Analysts also like the fact that Caterpillar is well-positioned to secure new business in emerging market economies for construction, infrastructure and land development work.
The ever-incisive FT columnist Martin Wolf offers prudent and timely advice concerning the reforms needed to ease credit market doldrums and right the global financial state of things.
One key practice Wolf would like to see addressed is bank / mortgage lender selling of mortgages they originate.
Designers of the practice had good intentions: It was designed to free-up capital so banks / mortgage lenders could have more money available for future homebuyers. A noble intention.
Unfortunately, as tradition reminds us, the road to perdition (and record housing sector slumps) is paved with good intentions. The problem, Wolf notes, is that the originate-and-distribute model encouraged banks / mortgage lenders to originate (in many cases for handsome fees) high-risk, very-poor-credit-quality mortgages with reckless abandon, because originators knew that the loan would be sold, and its status as a performing asset would be entirely someone else's problem. Save the best (mortgages), get rid of the rest.
It's not surprising, Wolf notes, that the originate-and-distribute model became laden with sloppy, irresponsible and even fraudulent loans. Wolf's reform: originators must be required to retain a portion of the equity of securitized loans. Hence, if / when they go bad, the originator loses money too.
Economic Analysis: Wolf's proposed financial / bond market reform is on the mark. If every party, including the originator, has a stake in a mortgage's repayment status, that will lead to higher-quality loans, while at the same time retaining the secondary market's benefit of freeing-up capital for new mortgages.
Lowe's is expected by analysts surveyed by Thomson Financial to report second-quarter earnings of 39 cents per share, down 18.8% from 48 cents per share in the same period in 2007, but up 28.2% from 28 cents per share in the previous quarter. The company has provided positive surprises in four of the past five quarters.
U.S. housing starts increased 8.2% in April 2008 -- an upside surprise skewed by a 36% rise in multi-family unit construction. Housing starts totaled a 1.032 million annual rate in April 2008, the U.S. Commerce Department 
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