Bill Ackman lays out his case. I for one (and hopefully Target (TGT) shareholders do to) hope he wins some board seats and shakes things up over there. They are sleepwalking through this recession and getting pounded by Wal-Mart (WMT).
Pershing Square Letter to Target Shareholders
Disclosure (“none” means no position):Long WMT, none
Well, we must give credit where it is due here. “Davidson” was ahead of the curve on this one. Read his prior criticism of Shiller here and here
From the WSJ:
Now another economist, Thomas Lawler, says Prof. Shiller’s chart is “bogus.” Mr. Lawler says Mr. Shiller cobbled together data that are inconsistent and sometimes unreliable. Mr. Shiller defends his work and accuses Mr. Lawler of making “wild allegations.”
The clash is more than just a spat between two of America’s most prominent housing mavens. It could affect the debate about exactly where the U.S. is in its housing cycle. The squabble also illustrates the paucity of reliable information on house prices.
If they rely too heavily on house-price gauges, politicians may get a distorted view of the severity of the slump and support overly drastic measures, says Kenneth Rosen, a housing economist at the University of California, Berkeley. Mr. Lawler says the Shiller chart also appears to understate the long-run rate of increase in home prices.
No one has found a precise way to measure changes in house prices. Because no two homes are exactly alike, changes in the price of one won’t necessarily be matched even by apparently similar homes nearby, much less those hundreds of miles away. Though some indexes track price changes in the same set of houses over time, those can be distorted by major improvements in some of the houses and deterioration in others. The publicly recorded transaction prices, used to create indexes, often are distorted by incentives given to buyers that aren’t tallied in the price.
It continues:
For 1890 to 1934, Mr. Shiller used data from a trio of economists led by Leo Grebler. Because he found no index for 1934 through 1953, Mr. Shiller wrote, “I had my research assistants fill that gap by tabulating prices in for-sale-by-owner ads in old newspapers,” covering just five cities. For 1953 through 1975, Mr. Shiller used an index compiled by the U.S. Bureau of Labor Statistics, or BLS. An index from the regulator of Fannie Mae and Freddie Mac covers the period through 1986, after which Mr. Shiller uses the S&P/Case-Shiller index he created with another economist, Karl Case.
“In other words,” Mr. Lawler wrote in a recent edition of his daily housing-market newsletter, “the long-term chart is based on a concatenation of different time series of home prices which use different methodologies, have different samples, measure different things, and all in all are, well, different.”
Mr. Lawler, a former Fannie Mae economist who now is an independent consultant in Leesburg, Va., says the BLS data used by Mr. Shiller was based on a “very small sample” and so isn’t reliable. Mr. Shiller’s chart shows that home prices from 1940 through 2000 rose at an annual real, or inflation-adjusted, rate of 0.7%. Data from the Census Bureau, however, puts the real rate at 2.3% for that period. Part of the difference may be due to improvements in the quality of homes, Mr. Lawler says, but he doubts that accounts for the whole gap.
Youtube plotting of housing prices on a roller coaster:
What to think?
I’m not sure how much confidence we can have in the Shiller data since the inputs it uses are not from the same series. It is sort of like trying to draw historical conclusions on stock prices by using different indexes for different periods. It doesn’t work.
Because of that, drawing conclusions on Shiller because of events that happened in the 1940’s based in his data I think is flawed and prone to massive error. Now it may also be part truth that Case-Shiller is a self fulfilling prophecy. If the index is treated as gospel, and it says home prices must fall “x”, then they may actually do so as potential buyers sit on the sidelines waiting to catch the low. The death of buyers then causes sellers to lower prices to move inventory.
If that is true then the problem is two fold. Incomplete data being used to make predictions and a publics blind acceptance of those outcome sin part causing them.
I think a healthy debate on the accuracy of the historical price points used in necessary.
Disclosure (“none” means no position):
Hat Tip to reader Chris for finding this…This is a sort of update on a post from March.
From the Daily Herald:
Bank of America Corp. (BAC) and Wells Fargo & Co. (WFC) are coordinating talks with underwriters to roll over at least 65 percent of the company’s credit line to June 22, 2012, said the people, who declined to be identified because terms aren’t set.
JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Wells Fargo made commitments to extend Sears’s revolver, one person said. The company is unlikely to extend its debt by the proposed $2.6 billion, or the full amount, according to the person, who said Sears might be able to get $2 billion.
Sears (SHLD), acquired by Edward Lampert-led Kmart Holding Corp. for $12.3 billion in 2005, plans to replace the existing five- year bank line due March 2010 “at a capacity more in line with our historical borrowing practices,” the retailer said in its annual report dated March 16.
If lenders approve the proposal, Hoffman Estates, Illinois- based Sears would join more than 75 companies that have amended credit terms this year at higher interest rates as banks increase borrowing costs.
Higher Interest Rate
The company is proposing to pay lenders that extend the loan an interest rate four percentage points more than the London interbank offered rate, the people said. That compares with the 87.5 basis-point spread the company currently pays, according to data compiled by Bloomberg. One basis point is 0.01 percentage point.
Kimberly Freely, a Sears spokeswoman, declined to comment on the negotiations, as did Wells Fargo’s Susan Stanley, Louise Hennessy of Bank of America and Tasha Pelio, a JPMorgan spokeswoman. Danielle Romero-Apsilos, a Citigroup spokeswoman, didn’t immediately return a message left at her office.
The extended revolving line would have a 100 basis-point fee on the unused portion of the loan, which would drop to 75 basis points if at least 50 percent of the facility is drawn, the people said. Sears’s current facility fee is 17.5 basis points, Bloomberg data show.
Sears borrowed $435 million from the $4 billion revolver and had $968 million of letters of credit outstanding under the facility as of Jan. 31, according to the annual filing. The company presented its proposal to roll over a portion of its credit line to individual lenders two weeks ago and held talks with banks this week, according to one person.
So, will Sears get it facility? Yes. Will it cost much more? Yes. Is it surprising or stunning that it does? No. Can we finally put the “Sears will have a liquidity crisis on 2009” refrain to bed? I hope so….
Disclosure (“none” means no position):Long SHLD, WFC, none
Please do yourself a favor. When presented with housing data, ignore anything that compares consecutive months figures, it has little meaning as there are huge seasonal reason for variations.
What you must compare to get the real picture is month to month over the previous year. With that being said (bold emphasis mine):
IRVINE, Calif. – April 16, 2009 – RealtyTrac® (http://www.realtytrac.com/), the leading online marketplace for foreclosure properties, today released its U.S. Foreclosure Market Report™ for Q1 2009, which shows that foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 803,489 properties in the first quarter, a 9 percent increase from the previous quarter and an increase of nearly 24 percent from Q1 2008. One in every 159 U.S. housing units received a foreclosure filing during the quarter.
Foreclosure filings were reported on 341,180 properties in March, a 17 percent increase from the previous month and a 46 percent increase from March 2008. The March and Q1 2009 totals were the highest monthly and quarterly totals since RealtyTrac began issuing its report in January 2005 despite a decrease in bank repossessions (REOs), which were down 13 percent from the fourth quarter of 2008 and 3 percent from February totals.“In the month of March we saw a record level of foreclosure activity — the number of households that received a foreclosure filing was more than 12 percent higher than the next highest month on record. Since much of this activity was in new foreclosure actions, it suggests that many lenders and servicers were holding off on executing foreclosures due to industry moratoria and legislative delays,” said James J. Saccacio, chief executive officer of RealtyTrac. “It’s also likely that the drop in REO activity can be attributed to these processing delays, rather than to any of the foreclosure prevention programs currently in place. It’s very likely that we’ll see the number of REOs increase again now that most of the moratoria have been lifted.
“On a positive note, it appears that demand is up in some of the harder-hit areas, particularly on bank-owned REO properties that first time homebuyers and investors see as bargains,” Saccacio continued. “But it’s unlikely that this increased demand will be enough to offset the growing number of foreclosures in the pipeline, accelerated by rising unemployment rates.”
Here is the Q1 foreclosure Map:
Yes I know that 60% of all foreclosures are in 5 states. I also know that a great deal of US economic activity comes from those areas, not good. Let’s also not forget that in many of those 6 states there was a foreclosure moratorium that only ended in April which skewed Q1’s results. It also means we ought to see an onslaught of activity in April that causes Q2 to really scare people.
Bottom line is that there is no stopping the housing free-fall yet. It may be slowing somewhat, but that is it.
Yes I also have seen the stories about “bidding wars” in some areas for homes. Here is the thing about that. These “bidding wars” are for select homes that are selling for 50% less than they sold for just a few years ago. This is not good. It also goes to the point that if we have to search for the occasional bidding war, it means there are not very many of them and if that is true, we have not seen the bottom in housing yet.
Remember, we have a year’s worth of new homes sitting on the market, empty. The scattered “bidding war” for a home with a 1/2 off sale doesn’t do anything to make me believe this slide has ended or will end anytime soon. now, it will slow the slide, but it will not stop it….not yet..
Disclosure (“none” means no position):
Hat Tip: Noise Free Investing (please visit link)
Disclosure (“none” means no position):
Thanks to reader Eric for emailing me this. It is long > 1hr. but worth every second and given today’s events, I think everyone ought to watch it. This is Eric Rosenfeld who was a trader and principal in the Long-Term Capital Management hedge fund, a landmark Wall Street disaster.
Prior to LTCM, Rosenfeld was an instructor at Harvard University. About one year after LTCM’s rescue, in 1999, he joined John Meriwether as a partner in JWM Partners LLC, which started operations with about $250 million under management. He left JWM Partners to join Paloma Partners, a Greenwich fund-of-funds.
Disclosure (“none” means no position):
DEBT, Ackman, Adam Warner, GE
– WOW, is just about the only thing you can say
– Quoted in ESPN …that is cool
– Shareholder outrage at MSNBC
Disclosure (“none” means no position):
Had a great conversation with CEO Mike Jackson and COO Mike Maroone from AutoNation (AN) after earnigs were released this morning.
Some notes:
– Q1 was the bottom for auto sales
– Expects an annual run rate of 11 million units by end of 2009
– The 900 to 1200 dealership closures that are currently estimated for 2009 is “substantially below” what they feel the eventual reality will be.
– Regarding Closures:
– Domestic metro market are those in which “rationalization” will occur
– Rural markets are “fine”
– Domestic share now at 30% and AutoNation now plans to lower that through the GM (GM) and Chrysler restructuring. Those dealerships that AN owns will then be transferred to other uses (Import, Luxury)
– Debt Covenants:
– Service down only 6% and has proven very resilient.
– GM’s announced 9 week shutdown is fantastic move as it means they are serious about getting rid of excess inventory
– Auto loan securitization will be TALF dependent through 2009
Here is Jackson’s CNBC appearnance this morning:
Disclosure (“none” means no position):Long AN, none
If there was any doubt AutoNation (AN) is pulling away from the pack as the premier auto dealer today, this quarter, in this environment ought to put any doubt to rest. These results surpassed even my most optimistic scenarios.
I have not dug into the detials and the 8-K has not been filed yet. But, key points are debt reduction, market share gains and inventory reduction.
He makes some great pointsTranscript:
Henry Groppe: IEA to blame for $100 oil spike
Disclosure (“none” means no position):
Read yesterday post on Bank of America (BAC), then come back.
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Wells Fargo (WFC) reported today and again, at first blush, great news.
Here are the basics:
Now, the deposit and checking news is indeed very god news because it is cheap (almost free) capital. The net-interest margin at over 4% is fantastic too. Although, with the new refi boom going on at Wells at lower rates, we ought to expect that to fall down the road. There is a lot to like in the report, a lot, but much of it is a longer term story.
So, what is my problem? This little paragraph :
The net unrealized loss on securities available for sale declined to $4.7 billion at March 31, 2009, from $9.9 billion at December 31, 2008. Approximately $850 million of the improvement was due to declining interest rates and narrower credit spreads. The remainder was due to the early adoption of FAS FSP 157-4, which clarified the use of trading prices in determining fair value for distressed securities in illiquid markets, thus moderating the need to use excessively distressed prices in valuing these securities in illiquid markets as we had done in prior periods.
In other words, Wells booked a $4.3 billion “mark-up” on these assets due to the accounting change. There was no material change to the quality of the assets nor was there a material change to the market at which they were being marked to. Because of this, Wells also sees it capital ratios boosted, artificially many would say.
This is problem for the market as a whole. If the FASB wanted to, they could change the rules even more to allow more ambiguity so that Wells ,B of A, JP Morgan (JPM) and Citi (C) would be able to just wipe out these losses all together.
Now, I have railed against the mark to market rules as they were and for what they did to the banks. But, in this case, the solution to the problem is worse than the original problem. It’s sort of like taking 50 aspirins for a headache, sure the pain is gone but look what you have now. Now, nobody believes banks earnings (at least I hope not) and the marks on these assets are even less trusted than they were before (did not think that was possible).
Why not mark them all to cash flows? After all, isn’t that what anything is really worth? Who cares what the market is selling something for if I am not selling it and it is performing 100% or 90%? Mark it to its production. Simple, no ambiguity, no judgment, no “impaired markets” etc., etc., etc.
Frustrating.
I am holding my shares because we need banks and I think it is very possible Wells Fargo and JP Morgan shareholders are the only major banks shareholders left standing when this is all over. My position is small relative to the whole and I can wait it out no problem.
Still does not make what is going on right…
Disclosure (“none” means no position):Long WFC, none
A book, Jeans, Davidson Speaks
– Folks need clothes
– From an email from my friend “Davidson”
“I view the recent Conservative deregulation of the financial markets one of the most destructive attacks on our free market system and the concept of capitalism since Hoover’s gross loose monetary policy and price support activity of the 1920’s. This has opened the world to viewing Capitalism as a crass process of money gathering by the few to the detriment of the many, when in fact true Capitalism empowers individual initiative and productivity by insuring that each person has fair access to the tools necessary to fulfill his/her vision.
Now that the Conservatives have so maligned the concept of Capitalism by permitting the few to ‘game the system”, it has thrown open the doors to Democratic self interested wish lists carrying extraordinary power to throw this country into socialism and the destruction of individual rights. We will not know how this will end for several years, but it is my hope that the recent Tea Parties although a media event is truly a sign of individual unrest and as individuals we will take this period as an opportunity to reinstall the rules of fairness to our financial system and rethink where we are going with everything else.”
Disclosure (“none” means no position):
We know “green” is good, right? But, will those green investments you may be considering pay off? A recent poll taken tells a familiar refrain. Cost trumps all other considerations, especially in a downturn. The most surprising part for me? Our youth are the most price sensitive when it comes to abandoning the “green” ideal.
From Marketing Charts:
The research found that while 76% of Millennials ages 13-29 feel it’s very important or important for brands to get involved in the green movement, 71% of teens (ages 13-17) surveyed say if they had to choose between a less expensive product or one that “gave back” to the environment, they would choose the less expensive product.
In contrast, the older Millennial demographic would choose the more expensive brand that gave back in a green way.
Moreover, the majority of Millennials surveyed found it confusing as to why products that are better for the environment are more expensive. Generate Insight noted that the extra cost – without consistent explanation – discourages the majority of shoppers from embracing and contributing to the green movement.
The study also found several other deterrents to Millennials living greener lives. These include products that require too much effort, are too time consuming and are not convenient; products that are confusing and difficult to understand, and families that are not involved in, supportive of or knowledgeable about the green movement
Additional findings from the survey:
74% of Millennials believe they can make a difference in helping Earth, but the number decreases significantly among the 13-17-year olds. Only 48% of 13-17 year olds feel they can make a difference because the problems are too huge for them to move the needle.
In terms of contributing most to living green, 87% of Millennials recycle; 84% turn off lights when not in use; 80% reduce water use; and 73% use energy-efficient light bulbs
The top three biggest hurdles for this generation faces when embracing the green movement are cost (41%), proof that they’re making a difference (24%), and ease of use ( 12%).
Let’s put aside the obvious hypocrisy of the generation that protests for one thing yet behaves an entirely different way. That is a rant for another day..
What was also surprising were the essentially flaccid actions taken by those willing to pay a bit more. It is the standard “little effect” list that our mothers told us when we were kids. Missing are larger investments like autos, solar panels, increased home insulation, energy saving appliances. I wish more data were available because I not really sure I consider buying an energy efficient light bulb for a buck or two more being “willing to pay more to save the environment”. I was thinking that statement would come with some more significant meaning.
The survey focused on items like soda (“A” gives 5% to environmental causes & “B” is cheaper). 70% of teens went for cheaper choice while only 60% of 18-29 went for 5% back. What I want to see is behavior when the cost of the item went up. If only 60% will spend nominally more when the issue is a can of Coke (KO), what is the behavior when it is $200 on a new washer and dryer or a water heater?
I think the fact auto dealers like AutoNation (AN) report hybrid vehicles choking lots because they will not sell due to the cost answers the question, no?
What the survey told me that investments in companies that focus on the “greening” of out world, at least from the consumer perspective are going to hit a serious wall until the overall economy suffers significant improvement. If the most devoted of the ideal are proving to be so price sensitive for low cost items, the number for older, more fiscally responsible generations must be stunningly low.
I think it also means that if the “green” company you are thinking about investing in is not doing business in a government mandated program (ethanol, for example), I would give serious pause as to what its future looks like at least for the next year or two..
Disclosure (“none” means no position):Long AN, none
Berkshire’s (BRK.A) Warren Buffett on what separates Wells Fargo (WFC) from the pack tat includes Bank of America (BAC), Citi (C) and JP Morgan (JPM).
Disclosure (“none” means no position):Long WFC, none
Atlas Shrugged, Rand, Peak Oil, CRA
– Since Rand’s classic is back on the bestseller list, here is what the author said in 1964:
Ayn Rand Interview
– About the book:
Ayn Rand
– Interview with Dr. Cambell
– So maybe the Community Reinvestment Act was a problem after all?
Disclosure (“none” means no position):