Sunday, 02 September 2007 01:00

Rampant share buybacks bold ill for future growth

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Excerpt from an article by John Plender, the thoughtful Financial Times commentator:

"If liquidity and confidence were the only considerations, there would be little cause for concern about the real economy. Yet US home lending has been a huge driver of global demand.

It is now going into reverse, with analysts such as Bill Gross of the Pimco fund management group expecting house price deflation in the US of up to 10 per cent in the absence of governmental intervention to prop up the market. On present policy, it is hard to see how the change in mortgage market conditions can fail to precipitate an economic slowdown.

In the midst of all this, many investors are baffled that equity markets have not been more seriously damaged. Part of the explanation, which may be a more hopeful pointer for the global economy, is that confidence in the corporate sector has taken much less of a knock than in finance. With relatively unstretched balance sheets, business people across the world have responded to falling share prices by initiating share buy-backs."

In response to the original article, I believe that the general corporate response to falling shares is not corporate buybacks. Corporations are coincidentally buying back shares because they cannot find a better yielding investment in which to place their excess cash. This might appease the complacent or short term shareholder, but it definitely bolds ill for future productivity and earnings for there is no investment in the future. This holds twice as true for those firms in growth industries. Entities in growth industries should be focused on growing, not buying back shares.

Sunday, 02 September 2007 01:00

Centex is trying hard to move inventory

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Advertising 56% discounts in price, as well as discounts in financing, Centex is showing that the pressure to move inventor at any cost is mounting. Remember, they are probably going to lose the ability to fund their mortgage arms through swaps due the impending loss of their investment grade rating, and their warehouse credit line (the loan they use to fund mortgages before they sell them off to investors) matures in part this month. This means dump'em while you still can. A 56% drop in revenue portends a much larger drop in profits when you add the write-offs for land devaluation, etc.

I am sure they are going to get stuck with many non-conforming loans on their warehouse line, which they will not have much longer as well. It should be an interesting reporting period for Centex.Webshell_madison3_3 Click thumbnail to expand...

From their site:

Madison Park, located between Radio Road and Davis Boulevard in Naples, exudes a small town neighborhood feeling and is just minutes away from Fifth Avenue restaurants and shopping.

QUINCY SQUARE #11-101. Villa home, 2BR/2BA + den, great rm, 2-car garage. 1,747 A/C sq. ft. Old Price $391,022 New Price $254,990 Save $136,032 Old Payment $1,955/mo New Payment Only $956/mo

Sunday, 02 September 2007 01:00

The Real Trend in US Housing Prices...

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Quote from the WSJ: "Underscoring the growing pessimism about housing, economists at Goldman Sachs in New York raised their forecast for the drop in U.S. home prices this year to 7% from a previous 5%. The forecast is based on the S&P/Case-Shiller national home-price index, considered the best such gauge by some housing economists. The Goldman economists expect a further 7% decline in house prices next year. In this year's second quarter, the index was down 3.2% from a year earlier.

Reggie's grassroots analysis:

The S&P index severely understates the glut in housing and the downward pressure on pricing. It uses the repeat sales methodology which only includes houses have that have been sold at least twice, which excludes all new construction. So the homebuilder’s product which is being slashed in price with butcher knives and cleavers don’t even show up in the index, and these homes must be slashed enough to sell in a slow market that no longer has cheap credit, has much competition in excess supply, and no longer has the phantom appraisal pricing which helped sustain the bubble in the first place (more on this later).

Moody's just put Lennar, Pulte and Centex on negative watch for downgrade to junk status. For those who read my earlier posts, non-investment grade entities cannot participate in swap agreements with investment grade entities through the banks to fund the mortgage special purpose companies. In addition, Centex's warehouse credit line expires this month (the credit line that they use to fund mortgages to sell their homes),

and somehow I doubt they will be able to find a replacement. For those who thought the homebuilders will be reaching a bottom soon --- Now, the party begins... They will be saddled with the depreciating assets and increasingly unfunded debt burdens that are throwing the mortgage bankers out of business just when the housing market spiral starts to accelerate downward. Pulte homes relies on their internal financing for almost 100% of their home sales. This is going to get much uglier and I foresee insolvency for more than a few. Despite what I see (and I have been wrong before) the home builders rallied yesterday and are definitely off of their lows.