I was stunned when I saw this. Why am I so focued on housing? Because I feel the disinformation out there on it is staggaring and hope to give folks a different, more accurate outlook on the situation.
First, 60% of homeowners think their home has fallen in value and 22% say it has stayed the same. Reality? 80% have lost value. Which means 20% of homeowners are not living in reality.
Here is the chart that got me:
So, 31% of all homeowners out there are likely to add to record home inventory levels at the first sign of improvement in the housing market. Now, we need to define “improvement”. According to the survey, the top response from 71% of people, think the market is improving if “there is evidence homes sales in my neighborhood are increasing”.
What does this tell us? At the first signs of stabilization in housing, it would seem we have yet another wave of inventories set to hit the market from people wanting to sell their home.
This again leads to a negative view on housing. Look at the supply demand equation:
Demand Decreasing:
Foreclosed buyers cannot go out and purchase another home
Tightened credit standards by banks eliminate marginal buyer
Rising unemployment
Falling prices reduce existing equity used to roll into new homes
Supply Increasing:
Foreclosed homes hitting market in record numbers
Homebuilders still building new homes
31% of existing homeowners ready to put homes on market at first sign of market stabilization
How does this equate to a rebound in housing anytike soon? It isn’t even enough for one of these factors to be eliminated from the equation, we need several.
All the talk today is, “are we in recovery or not”. Let’s look at a chart of retail sales which dictates the health of the consumer who is 2/3 of the economy (click to enlarge):
What does it tell us? Things are worse than February but not a bad as March. We could say that the “rate of decline” has slowed so that is good news. We could also say we are “still declining” so that is bad.
What do I think? March was abnormally bad, making April better than it really was. I think we in the middle of the two which means still a sizable decline. This makes sense to me when you seen the recent foreclosure wave, continued record declines in home prices, rising unemployment and steep declines in GDP.
Here is another issue not talked about. 342,000 homes received foreclosure notices last month, on top of the 320,000 the month before. Here is the “issue”. These folks have been mostly being held out of foreclosure because of a 6 month foreclosure moratorium by the banks. During that time frame they clearly were not paying their loan. So, where was the money going? My guess would be clothing, dinners, entertainment, etc. There was no rent or mortgage to pay so it was spent. We know that once people admit foreclosure, they sit and wait without making payments until forced to leave. Unless they are one of the unfortunate to have lost a job (the minority), they now have disposable income that they were before putting towards a home payment.
Now that these folks are getting foreclosed on and booted from their homes, they’ll need to come up with a rent payment. That means far less disposable income available for other uses. The argument can be made this money has be artificially making retail sales better than they would ordinarily have been, and that is a scary thought. It also means we can expect another negative headwind for sales trends to continue down on top of the others previously mentioned.
The point in the exercise is two-fold. First, don’t make long term predictions based on small time data samples. You need a longer series. Second, and more importantly, you need to look at different data, not just one. For instance, if we only looked at the chart above, the clear conclusion might be things are improving. But, if we add the data from home prices, foreclosures and unemployment we get a very different story and then we would have to wonder where the money for people to improve retail sales is coming from.
(UPDATE: At end of post is the list of Chrysler dealerships closing. AutoNation has 7)
This has been a long time coming. Both Chrysler and GM (GM) are expected to notify up to 2000 dealers combined that they are closing either today or tomorrow. The moves are expected to cost about 150,000 jobs at the dealership level. Note, these job losses DO NOT include losses associated with the dealerships such as cleaning & maintenance crews contracted to do work on the premises and other ancillary services.
Is this a good thing? As sad as it is, and a bad as the job losses will be, it is the best thing for the industry on all levels. Those dealerships left will become stronger as their market share immediately grows and increased profitability ought to follow.
Now the GM closings, as far as I know can only be done in a Chapter 11 scenario. In any other scenario, GM will most likely spend an eternity in State Courts for violation of State Franchise Laws. A Chapter 11 eliminates that scenario. Now the other option is for GM to offer franchisees a sweetner to take the deal (they just may as those being closed are most likely not profitable now). This would be a waste of time and money for GM, BUT, based on its history, just may be what happens.
Who is the main beneficiary of this? AutoNation (AN). Why?
1- They have made no secret of their desire to reduce domestic exposure, this may do it for them very easily. Now, if some of their dealerships are chosen, since AutoNation owns the building and land on almost all dealerships, transferring that property to another brand is virtually as simple as moving existing inventory to another dealer, changing signs and then moving new inventory in.
2- Most of the closing are expected to be in Metro markets. AutoNation has heavy exposure to those very markets. So, even if the scenario in #1 does not unfold, they do just fine because they receive large market share from the dealerships closing around them.
3- Totally aside from the other two scenarios, there are other dealer groups in a precarious situation that simply will not be able to withstand the loss of a franchise, even a marginally profitable one. Consider the scenario. A dealer with three dealerships Ford (F), GM (GM) and Chrysler. Depending on the mix, the GM dealership could be covering for losses at Ford and Chrysler (or Chrysler at Ford & GM). But, because of the area concentration of GM (Chrysler) dealerships, their is selected to close. Now the dealer is stuck with two money losing dealerships and that may just force the closure of the other two.
Before you dismiss this scenario, you must consider that most dealers own multiple locations and depending on the sales mix in the area, the above scenario is not only possible, but very likely in a number of locations.
The summary here is that the end number of closings from these actions will be in excess of the final, stated number form both Chrysler and GM.
When all is said and done, the clear winners will be those left standing. Their earnings power when its over will be in excess of pre-dealer decimation levels even with industry sales below 2006-2007 levels. They will receive immediate benefits from share and margin increases that will be maintained as a return to previous dealer levels is not likely for years..
This has been a long time coming. Both Chrysler and GM (GM) are expected to notify up to 2000 dealers combined that they are closing either today or tomorrow. The moves are expected to cost about 150,000 jobs at the dealership level. Note, these job losses DO NOT include losses associated with the dealerships such as cleaning & maintenance crews contracted to do work on the premises and other ancillary services.
Is this a good thing? As sad as it is, and a bad as the job losses will be, it is the best thing for the industry on all levels. Those dealerships left will become stronger as their market share immediately grows and increased profitability ought to follow.
Now the GM closings, as far as I know can only be done in a Chapter 11 scenario. In any other scenario, GM will most likely spend an eternity in State Courts for violation of State Franchise Laws. A Chapter 11 eliminates that scenario. Now the other option is for GM to offer franchisees a sweetner to take the deal (they just may as those being closed are most likely not profitable now). This would be a waste of time and money for GM, BUT, based on its history, just may be what happens.
Who is the main beneficiary of this? AutoNation (AN). Why?
1- They have made no secret of their desire to reduce domestic exposure, this may do it for them very easily. Now, if some of their dealerships are chosen, since AutoNation owns the building and land on almost all dealerships, transferring that property to another brand is virtually as simple as moving existing inventory to another dealer, changing signs and then moving new inventory in.
2- Most of the closing are expected to be in Metro markets. AutoNation has heavy exposure to those very markets. So, even if the scenario in #1 does not unfold, they do just fine because they receive large market share from the dealerships closing around them.
3- Totally aside from the other two scenarios, there are other dealer groups in a precarious situation that simply will not be able to withstand the loss of a franchise, even a marginally profitable one. Consider the scenario. A dealer with three dealerships Ford (F), GM (GM) and Chrysler. Depending on the mix, the GM dealership could be covering for losses at Ford and Chrysler (or Chrysler at Ford & GM). But, because of the area concentration of GM (Chrysler) dealerships, their is selected to close. Now the dealer is stuck with two money losing dealerships and that may just force the closure of the other two.
Before you dismiss this scenario, you must consider that most dealers own multiple locations and depending on the sales mix in the area, the above scenario is not only possible, but very likely in a number of locations.
The summary here is that the end number of closings from these actions will be in excess of the final, stated number form both Chrysler and GM.
When all is said and done, the clear winners will be those left standing. Their earnings power when its over will be in excess of pre-dealer decimation levels even with industry sales below 2006-2007 levels. They will receive immediate benefits from share and margin increases that will be maintained as a return to previous dealer levels is not likely for years..
Disclosure (“none” means no position):Long AN, none
Now that the market has sold off some, time to buy some items performing well.
Recently we looked at News Corp (NWS) and noticed that unlike its various industries, both the Newspaper business lead by the Wall St. Journal was increasing paid subscriptions and the Cable TV dicision, lead by Fox News was both increasing share and advertising rates. This was one of the reason we were tempted to buy shares. At the tine, only the recent market surge prevented us from doing so.
Now this on Fox’s internet sites is but more good news for the company.
Fox News’ online ascent continues, as the network’s formerly lightly-trafficked Web site FoxNews.com has significantly improved its numbers for several key engagement scores over the past year as its audience has steadily climbed, according to newly-released data from Nielsen Online.
According to Nielsen, FoxNews.com’s audience ballooned by nearly 50 percent in April to 15.7 million uniques versus the 10.5 million reached during the same month in 2008. The site reaches over 18 million users when all of its sub-domain URLs are included (such as Fox News’ mobile site and FoxBusiness.com).
But even more eye-catching is overall increase in FoxNews.com¹s stickiness. For example, the site¹s total page views jumped by 75 percent in April, going from 382 million last year to 669 million this year.
That’s more page views than were recorded by category giant Yahoo News (which generated 614 million), despite reaching an audience less than half its size (Yahoo officials contend that the home page for Yahoo News does not automatically refresh its content, limiting the total number of page views it serves).
Furthermore, when examined on an individual site vs. site basis, FoxNews.com led all the major sites in Nielsen¹s News and Information category in time per person (an average of 39.9 minutes, just edging CNN.com) and pages per person (an average of 43, four more than the AOL News) in April.
It seems every division of the Fox franchise is running full speed ahead in a very difficult environment. As a potential investor, when you can see this (and the company is buying back shares), over $6B of cash on the books and a low stock price, the decision to buy or not becomes much easier. Look at it this way, the cash on the books is roughly $3 a share which means you are paying just $6 for all the assets and operations.
Shares closed at $9.91 Wednesday. any lower, not starting to buy might be impossible..
Disclosure (“none” means no position):None…will be buying soon
Was having a conversation with “Davidson” about Leucadia (LUK) after posting the annual meeting notes the other day. He was talking about the excellence of management of which I agree. He is an owner of shares. I said my hesitation in owning shares was that I could not accurately forecast earnings into the future due to the fact they tend to buy then sell businesses.
Here is his reply:
Ahh. Here is where you plot management’s results, read their history of investing in distressed assets and turning them into gains and then realize that this is not a cash flow nor an earnings story. LUK is a holding co. They report boosts in BV only when an asset has been sold which may take 10yrs. Analysts really have to do a bit of leg work to grasp the value growth from year to year. My plot of BV vs. stock price I think tells the story of success.
Book Value/Share Price Analysis
There really isn’t any doubt as too the skill of Steinberg or Cummings skill. It is pretty clear that earnings will fluctuate wildly depending on what is sold in what year. So, Davidson’s BV chart is the way to go.
If we look at the chart, it is pretty clear that Leucadia, when priced right, tend to trade around book value. That gap rose to almost 2 times book over the last couple years and the stock has responded by falling from the $50’s to the current $20 as book value fell.
Current book has fallen to roughly $12 a share and that is due mainly to $1 billion in asset write-downs in Q4 2008 (like the rest of the world) and an additional $900m in debt. A normalized operating environment book is more likely to be in the $15-$16 range which means shares, currently price at $20 are getting close to a “buy” point for those who want to be shareholders.
I hope this was not a surprise. We have been pounding this point here repeatedly. April was the month moratoriums in foreclosures expired. It should not be a surprise that folks in November 2008 whom could not afford their home still can’t in April 2009. People losing their jobs who put no money or minimal money down on a home and then tapped what little equity they may have had in it have no ability at all to stay in those homes, none.
RealtyTrac® (realtytrac.com), the leading online marketplace for foreclosure properties, today released its April 2009 U.S. Foreclosure Market Report™, which shows foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 342,038 U.S. properties during the month, an increase of less than 1 percent from the previous month and an increase of 32 percent from April 2008. The report also shows that one in every 374 U.S. housing units received a foreclosure filing in April, the highest monthly foreclosure rate ever posted since RealtyTrac began issuing its report in January 2005.
“Total foreclosure activity in April ended up slightly above the previous month, once again hitting a record-high level,” said James J. Saccacio, chief executive officer of RealtyTrac. “Much of this activity is at the initial stages of foreclosure – the default and auction stages – while bank repossessions, or REOs, were down on a monthly and annual basis to their lowest level since March 2008. This suggests that many lenders and servicers are beginning foreclosure proceedings on delinquent loans that had been delayed by legislative and industry moratoria. It’s likely that we’ll see a corresponding spike in REOs as these loans move through the foreclosure process over the next few months.”
the more important number in my opinion each month is the foreclosure number. It represents not only an addition to the existing housing inventory, but a more permanent reduction in demand as foreclosed buyers are not going to then go out and purchase another home.
When you add these folks to those losing jobs, demand is plummeting. What’s worse is that this is not demand destruction in terms of those waiting for better prices, this is a more permanent kind of demand destruction as these buyers are not coming back into the market for quite some time (years).
I have still yet to been offered any type of evidence that housing is going to do anything but fall further from here for at least the next 6 months..
If you have it, please either email it or add it to the comments…
No matter what your opinion of Ackman, we all have to be thankful he is giving us something other that the Government to talk about.
In an interesting development yesterday Target (TGT) made a move that to some extent, validates what Ackman has been saying for over a year now, Target badly underutilized their grocery potential. Target announced that in 100 stores they are dramatically expanding their grocery offerings. This is a move that Ackman has been pushing for and Target’s grudging acceptance if it, so close to the upcoming meeting in which Ackman’s slate of electors will be voted on, well ought to give current shareholders pause before checking their prospective boxes on the proxy.
Here is the thing. If you are a shareholder and happy about the company’s performance the past two years, stick with what you have. IF, on the other hand, you are not and feel that like Wal-Mart (WMT), Target ought to have seen results improve as the consumer felt more pinched, not deteriorate, that you need change. Change on the board level would not be akin to “wholesale change” but would be significant enough to alter the company’s focus and direction in way that should pay of long term.
Either way, will be fun to watch..
Disclosure (“none” means no position):Long WMT, none
Turn out Goldman Sachs and Brookfield Asset also got involved in the bidding. The final DIP lender must be approved by the judge but after the process that has been undertaken, one ought to assume that it gets rubber stamped.
Now that this is done, the next big decision, expected tomorrow and on the CMBS lenders challenge to certain properties being included in the filing. The judge is expected to rule with GGP in this one also and that sets the stage for stronger operational results through the BK process.
The Farallon group, which includes Canpartners Investments IV LLC and Delaware Street Capital Master Fund LP among others, beat out both activist investor William Ackman’s Pershing Square Capital Management LP and a third group led by Goldman Sachs Group Inc. (GS) to provide the $400 million in financial backing, according to people familiar with the talks.
General Growth outlined the new debtor-in-possession, or DIP, financing in filings in its case on Tuesday in U.S. Bankruptcy Court in the Southern District of New York.
The new Farallon pact caps nearly four weeks of back-and-forth negotiations in which General Growth first chose a proposal from Pershing, then went with Farallon’s group, then back to Pershing and finally back to Farallon. The drawn-out process resulted in several aspects of the deal shifting in favor of General Growth, including the DIP lenders requiring less collateral for their loan and the elimination of an offer of warrants convertible to company stock after the bankruptcy.
The new Farallon pact provides lenders in the DIP pact a secondary claim to cash flow at General Growth’s corporate level, behind the claims of secured lenders. Previous pacts provided the DIP lenders a senior lien on that cash flow, raising objections from General Growth’s secured lenders. Another change: The DIP lenders no longer get a second lien on General Growth assets that already have first mortgages. The DIP lenders do, however, retain a first lien on a collection of unencumbered properties.
The new pact also omits any warrants for the lenders similar to those in the initial Pershing deal, which would have granted Pershing warrants convertible to 4.9% of General Growth’s stock upon emergence from bankruptcy. Pershing already amassed a nearly 8% stake in General Growth through buying stock in the months before the bankruptcy filing. Pershing also tied up another 17% of General Growth stock by putting it in swap contracts with various investment banks.
Now, the new arrangement with the Farallon group allows for General Growth to pay off the DIP lenders by converting their loan into up to 8% of the company’s stock, depending on the company’s equity value upon emerging from bankruptcy, rather than paying in cash. The original Pershing deal had a similar provision. Farallon and some of the other lenders in its group already are General Growth creditors, holding an undisclosed amount of the company’s bonds.
The Farallon deal comes with an interest rate of Libor plus 12%, limiting the lowest-acceptable Libor rate to 1.5%. The pact has a term of two years. The exit fee is set at 3.75%, down from 4% in the Farallon group’s initial proposal.
General Growth intends to use much of the DIP financing to pay a short-term, high-interest loan that Goldman provided it in the months before its bankruptcy filing. Goldman’s failed bid to provide General Growth’s DIP financing included participation from Brookfield Asset Management Inc. (BAM), the Canadian office and retail property owner.
Disclosure (“none” means no position):Long GGWPQ, None
