HSBC Reports One of the Biggest Misses o…

21-02-2017 Hits:205 BoomBustBlog Reggie Middleton

HSBC Reports One of the Biggest Misses of the Year, We Warned Quite Thoroughly in September

Our HSBC research report released September of 2016 has proven to be 110% correct. This is the first sentence of our report: HSBC Common Equity Returns: Notwithstanding a possible boost from...

Read more

Censorship, Autonomy and Risk Management…

19-02-2017 Hits:514 BoomBustBlog Reggie Middleton

Censorship, Autonomy and Risk Management When Dealing With Digital Assets: How to Minimize Risk of Loss

This is a video on the topic of the qualities of Bitcoin blockchain's censorship-proof attributes and how they apply in the world we live in today. It is imperative that you...

Read more

How to Use, Trade, Store and Invest in B…

16-02-2017 Hits:987 BoomBustBlog Reggie Middleton

How to Use, Trade, Store and Invest in Bitcoin Digital Assets - Step by Step, Part 1

I will teach novices and experts alike how to fit Bitcoin into an investment portfolio safely and with the optimum risk-adjusted potential - along with step-by-step guides, instructions and tutorials. This...

Read more

Italy Approves 1.2% of GDP to Save It's …

16-02-2017 Hits:496 BoomBustBlog Reggie Middleton

Italy Approves 1.2% of GDP to Save It's Troubled Banks... Again! Exactly As We Warned Last Year

I've been warning about Italy's troubled banks since 2010, and last year I pushed two very detailed reports about what was essentially Italy's Bear Stearns and Lehman Brothers. Italy is a...

Read more

T-Mobile Has Eliminated Most of Verizon'…

15-02-2017 Hits:550 BoomBustBlog Reggie Middleton

T-Mobile Has Eliminated Most of Verizon's Network Advantages At A Lower Price Point - Uh Oh!

T-Mobile reported their Q4 2016 results yesterday, and guess what?

Read more

Association with Donald Trump Cost Uber …

13-02-2017 Hits:576 BoomBustBlog Reggie Middleton

Association with Donald Trump Cost Uber $200 Million in 45 Days, Other Companies Feel It Too

Uber's CEO perceived association with Donald Trump (sitting on his tech advisory panel) has caused a viral #DelteUber campaign, resulting in over 200,000 Uber accounts deleted in 45 days. Videos of the...

Read more

Verizon Unlimited, T-Mobile Upgrades, Sp…

13-02-2017 Hits:1324 BoomBustBlog Reggie Middleton

Verizon Unlimited, T-Mobile Upgrades, Sprint Drops Prices Through Floor: The Deadbeat Carriers are Beating Themselves To Death

Update: T-Mobile responds to Sprint & Verizon price cuts but adding additional features to its fixed rate plan. Competition continues to benefit the consumer, but net margins will be/are hovering...

Read more

Fitch Has Effectively Downgraded The Tru…

10-02-2017 Hits:676 BoomBustBlog Reggie Middleton

Fitch Has Effectively Downgraded The Trump Administration, Albeit Too Late As Usual

After my many, many warnings about Donald Trump and his administration (I'll list those a little later)... It's official, Fitch has actually warned that the Trump administration is detrimental to...

Read more

Chinese Bitcoin Exchanges Suspend Client…

09-02-2017 Hits:831 BoomBustBlog Reggie Middleton

Chinese Bitcoin Exchanges Suspend Client Withdrawals. I Warned You About Heteronomous Wallets! reports "Chinese Exchanges Suspend Withdrawals for One Month": The two largest Chinese Bitcoin exchanges have suspended Bitcoin and Litecoin withdrawals for one month. The news follows China’s central bank...

Read more

Will Japan's Declaration of Bitcoin as L…

09-02-2017 Hits:879 BoomBustBlog Reggie Middleton

Will Japan's Declaration of Bitcoin as Legal Tender Accelerate Cryptocurrency Mainstream Adoption?

It’s being reported by Sputnik News and other sources that Japan has declared Bitcoin to be legal tender. Unfortunately, I have not been able to quickly confirm this through Japanese...

Read more

Deutsche Bank's Year End Analysis and Re…

08-02-2017 Hits:1069 BoomBustBlog Reggie Middleton

Deutsche Bank's Year End Analysis and Review - BoomBustBlog Style

This is our Q4 analysis of Deutsche Bank. When analyzing and valuing entities such as banks and platform-driven tech companies, perception is always key. You see, what one maverick or...

Read more

Revisiting the Breakdown of the Macro Dr…

07-02-2017 Hits:740 BoomBustBlog Reggie Middleton

Revisiting the Breakdown of the Macro Drivers Behind Bitcoin's Price Spike, Exactly As I Foretold 30 Day Ago

One month ago I walked through the macro influences behind Bitcoin's price pop and drop in "The Macro Truth About The Big Bitcoin Pop and Drop: The Mainstream Media Doesn't...

Read more

Required reading for this blog post is the fully consolidated Lennar analysis on my site. That analysis was performed right before Lennar started selling off bulk assets at a sharp discount, which spawned this follow up analysis.

Insolvency: a financial condition experienced by a person or business entity when their assets no longer exceed their liabilities, commonly referred to as 'balance-sheet' insolvency

I am now delivering on the long ago promise to make public the granular calculations of my opinion on Lennar's (the nation's largest home builder) recent property sales to raise cash. I looked at the date the models was completed by the analysts, and yes, it has been over a month. Well, here it is. It has not been proofread yet, so forgive any typos. To begin with, I alleged Lennar was near insolvent over a month ago. Events since then have simply validated my opinion, and intensified them as well. I believe that Lennar did the right thing by selling the assets. They simply waited too long. I have heard from at least two, unrelated private equity parties who both said, unbeknownst to each other, that they have been trying to buy land from Lennar but Lennar had been unrealistic with their expectations in terms of the valuation of the property. Now they are selling at 50% discounts. This should have been done last year. The cost to their net worth will now be astronomical, and as you can see they have already stepped into the realm of insolvency. I will have the full 60 page analysis ready for dowload in a day or two, free for registered users and super free for those who have used the invite tool in the user menu to invite thier friends to visit the blog.Wink

In the Lennar model, I backed into the valuation write down (impairment) it would take to push Lennar's fully consolidated financial statements (not the stuff they have been reporting, but the real deal with all assets and liabilities taken into consideration) into a debt to capital ratio in excess of 100%, or in other words - insolvency. The magic number is anything above 8%. At 8%, Lennar's assets no longer exceed the value of thier liabilities. This is excluding all non-recourse debt and anything that does not contractually bind the company to explicitly extend capital such as maintenance agreements, performance agreements, etc. This is telling, as you may know, since they recently sold large parcels of land and work in process at a 50% discount to reported book (that is 60% as reported in the press, less rights of first refusal and partial ownership of the new venture). This wasn't their tertiary properties (like this one in Chicago) either. Thus, any write down on much of the existing properties will probably be worse since macro conditions are worsening and a significant amount of the properties left are inferior to what they just sold. We haven't gotten very far into this story and already it doesn't look good.

I've decided to make this update as conservative as possible, so I will apply the greatest possible benefit of doubt towards Lennar's favor. For instance, the largest property sale was reported at a 60% discount. I reduced it to 50%. I will assume that that reduced discount is 100% overshot as compared to the rest of Lennar's current inventory and further reduce it by 50% to apply it as a mark to market at 25%. Now, I will redcue that even further for work in process and finished homes and assume a 15% discount on those properties since they are more liquid than raw land (eventhought the original sale included whole finished communities, work in process and raw land and still came out to a 50% off sale). So let's assume we have a weighted average of about 18% discount to current inventory book values. I feel this is extremely conservative, particularly if you read A note on mortgages, overly optimistic recovery rates and recent events... , where in California a 33% price reduction would not move a finished existing REO. Centex, Beazer, Hovnanian, et. al. are having similar issues despite some discounts considerably over 30%. Alas, let's stick with our 18% mark, and consider it the mark that will be fed into the Lennar model.

Lennar Insovlent 

This 18% combined with the relatively heavy debt load Lennar carries put's roughly 10.2% past the level of insolvency. Now, I truly believe that the 18% mark is definitively on the low side, but it is more than enough to surpass the 8% needed to make Lennar insovent. Included in the calculations is:

  1. An 18% FAS 144 impairment factor to bring inventory mark to makret as a result of inventory valuations available from the recent asset sales. We have provided this factor instead of a one time charge, but included both for the sake of comparison and chose the one that would have the least impact according to GAAP rules, to be as conservative as possible.  I obviouslydon't feel this woud be either one time or extraordinary, hence probably belongs in  FAS 144 category.
  2. During 4Q2007, Lennar sold properties at sales price of  $525 million with a net book value of approximately $1.3 billion.  As a result I expect Lennar to write-down a  minimum loss of $775 million in 4Q2007.
  3. During 4Q2007,  Lennar has sold 8,300 homesites to Metro Development Group and 11,000 sites to a strategic land investor. As a result, total home sites have been reduced by 31,108 to include the effects of these 2 transactions.


Thus, not only is Lennar currently insolvent, but according to Alman's Z score analysis, they are nearly assured to be heading into bankruptcy, sporting a score considerably below what it would take to consider them a bankruptcy candidate, and trending considerably lower the next 8 quarter where it will slightly improve in a lateral trend. It is unlikely that Lennar will be able to survive like this for such an extended period. I need to check to see if my team has discovered any tripped covenenats, but chances are they either are tripped or will be tripped within a year.



From a purely fundamental perspective, it is easy to see how Lennar got to this point. Let's browse through the numbers and compare to the macro backdrop.


As you can see, there earning have deteriorated horribly. Lennar' earnings are a function of their margins, which are highly correlated with housing values. That shouldn't be the case since they can pass lower and higher costs off to thier customers. The problem is that Lennar funds acquisistions with debt, and the processed is lagged. So, when the market is rising, Lennar benefits wth cheap inventory and productive leverage. When the market is falling, they have overpriced inventory that won't move, negative margins and the leverage strangles them. This relationship leaves Lennar (as well as other builders, this is not a Lennar specfic phenomenon) with a extremely sensitive and leveraged connection with landvalues as you can see in the chart below.

share price trend

 The chart below is a dated example of my housing value forecasts. I was more pessimistic than most pundits in terms of the severity of the housing downturn, and it appears that even I undershot the mark. Although I feel that these projections may not be accurate in terms of being slightly optimistic, they still can easily illustrate a trend for the purposes of showing the predicament of Lennar. Using the sensitivty of Lennar's share price comparison above with the value forecasts below, you can guess where the market will push Lennar's share prices. This is not taking into consideration thier insolvency.

land run up

These are the comparative Census regions to assist in making the following chart on gross margins more coherent. 

 Lennar's operating regions

Now, knowing that thier margins are highly sensitive to housing value fluctuations, where do you think those are going, and what effect do you think that will have on Lennar's solvency?


Even if we exclude the impairments (which drive everything deeply into the negative), Lennar's operating margins are heavily negative in almost all operating areas.

 gross margins exluding impairments

 Revenues look no better.


Which brings us round robin back to the issue of Lennar's solvency.



Now, Lennar and the homebuilders in general have become a trading commodity, and thus their share prices don't necessarily directly reflect the fundamentals on a day to day basis. In the case of Lennar, I have felt that this has offered me an oppurtunity, since I believe this company is truly done for. Even if they raise significant cash by selling off assets, if they sell them off for anywhere near what the most recent market transactions have priced them at, they will still be balance sheet insolvent. I am betting that their creditors don't perform the level of analysis that I do, and as long as they are not reading this blog now, they will not be pulling credit right now. Since these have become trading commodities and traders look at price and not value, I ignore daily price fluctuations except as oppurtunities to increase a bearish standpoint. But those who fancy themselves fundamental investors and trying to go long are most likely doing so by attempting to measure book value and trying to find a bottom. Bottom fishing is gambling and not worth the risk in my opinion. In the case of Lennar, the bottom is either bankruptcy and/or liquidation. Like I said, a dangerous gambit - there are easier ways to make money.

The bottom fishing value guys look at Lennar, and probably see this:

Lennar BV

They then say, "Hey, anything below $14 is a B-U-Y!" Unfortunatey, they don't see what's below if they are not careful. I am all for value investing and buying on the cheap. It is just that sometimes, you get what you pay for!

Lennar Insovlent