Archive for August 14th, 2007
John is a hard working middle-class man in a mixed blue collar and upcoming white collar neighborhood. A vestige of old times when working class groups of families purchased homes before the mention of any housing bubble or subprime mortgage ever hit the CNBC newswires. Now this neighborhood is experiencing a Renaissance that doesn’t include blue collar working class families. “I wouldn’t be able to purchase my own home if I were to buy it right now,” echoes John as many families in this neighborhood feel the same sentiment. The idea of using interest only mortgages or refinancing to tap into mortgage equity seem like a foreign language to his frugal and debt free way of life. The only debt that he has, he proudly tells me, is the mortgage debt which he only has a few years left to pay off. Welcome to a bygone era and the rhetoric of a past decade. We are living in a time where the definition of “home” is radically shifting. Take a look at some quotes from the ex-head honcho of the National Association of Realtors had to say over the past few years:
March 2005: ” I believe that in years to come historians will see the beginning of the twenty-first century as the “golden age” of real estate. And I want to persuade you to take advantage of this historic opportunity. ”
Source: Are You Missing the Real Estate Boom? Why Home Values and Other Real Estate Investments will Climb Through the End of the Decade-And How To Profit From Them” March 2005, p4. Author David Lereah
What made real estate so special in March of 2005? Did it all of sudden become supernatural and have uncanny healing powers? Nothing really changed except the fuel of a massive credit bubble and rhetoric like this was swallowed by buyers and sellers believing that they somehow found El Dorado and an endless money pit in their home. This language started many years ago but you can see even as of March of 2005, the psychology of many in the housing syndicate was such that housing was entering some kind of new era. Remember the book DOW 30,000? Maybe someone should write 500 Square Foot Box, $500,000. Even the last sentence about “I want to persuade you…” echoes of a sales pitch for a speculative product. There was no frame of economic reference aside from a tiny window of 2001 to 2005 that of course, made it seem that real estate was the hottest investment on the planet. And it was. But not anymore. Like any speculative bubble, those that get in early and are able to time the peak make out like bandits. Yet those that come late to the party have a hard time figuring out what happened. Even as the market was clearly showing signs of bubblicious behavior, we get more absurd housing teeth gnashing.
August 2005: “If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years. It’s as if you had 500,000 dollar bills stuffed in your mattress.”
Source: David Lereah quote, August 2005 LA Times quote
Say what? So let me get this straight, if you paid off your mortgage you somehow have a problem managing your funds? Of course, the assumption here is that you should use the money to buy more homes and flip them like the Ukrainian gymnastic team. Maybe you should slap the virtual ATM of home equity lines and loans to the side of your house and turn on the shiny chrome spigot and let the equity ooze out. And guess what? People believed this and actually followed the lead of the housing syndicate. Mortgage equity withdrawals became a new industry unto itself. The problem with the statement above is that it isn’t completely financially prudent. In fact, the better advice would be to sell a home in an overpriced area, rent, and ride the bubble down. But no one in the housing industry would say this because if you would sell and wait for a few years that would mean that the following isn’t going on during your sabbatical from housing: Sales go down, refinances drop, construction falls, home upgrades no longer happen, and anything else that lives on the butter churning housing industry. Sell, upgrade, refinance, rinse and repeat seems to have stopped and as you may have currently noticed, the way housing goes so goes the world economy.
April 2006: David Lereah, the Realtors’ chief economist, said he was still looking for a gradual slowdown in housing that would result in a drop of around 6 percent in home sales this year and a slowing in price gains to around 6 percent, compared with the double-digit gains in prices in recent years.
Source: St. Petersburg Times, April 26, 2006
This statement above highlights another fallacy in the housing syndicate logic. Yes, real estate can appreciate by double-digit returns with no economic fundamentally sound reason however, the downside has a safety net of only single digit drops. Think about the implication here for the consumer. “Well, if I buy I have the potential of 20 percent returns but if the market goes down, I will only lose 5 percent for one year and then we’ll be back at double-digit returns.” Hedge funds live off these analysis. Risk assessment and running market assumptions on potential future scenarios. Most consumers didn’t do either but bought with the unconscious belief that housing will go up drastically but the downside was very minimal. Clearly, we are now seeing with some Real Homes of Genius that homes can drop $100,000 in one year. So if they are wrong about the downside what else were they wrong about?
September 2006: “With a general background of growing population and favorable affordability conditions, home sales are staying at very healthy levels,” said Lereah. “As a result, we’ll continue to see above-normal home price appreciation for the foreseeable future.”
Source: Chicken Little’s revenge, Salon
Strike three amigo. We are now facing housing depreciation on a national level, the first time since the Great Depression. He gave this opinion in the same month that Bloomberg mentioned this fact! And it doesn’t seem like we are on track for a bounce back this summer with the mortgage market debacle. So we’ve given them long enough with one year. Clearly the Chief Economist is the figurehead for his industry, and as such he speaks for many in the industry. I was listening to a local housing show on the weekends that discusses the real estate market and the host did an absolute 180. All of sudden, he turned into a Democrat and started blaming mortgage brokers directly for the housing debacle. “I can’t believe these brokers with subprime lending…” as he went off on his opportunistic CYA moment. Keep in mind, a year ago this same person was echoing the benefits of adjustable rate mortgages and pumping housing like the next great invention. Unbelievable. But that is the psychology of a good sales person; once one market is dry make sure you are prepared to jump into the next market. And this host was since he touted his incredible ability of refinancing and saving folks from foreclosure. Still trying to churn the butter. And he had a broker call in and gave him a piece of his leveraged mind, “what you are doing is wrong. What we need is the Fed to drop rates. We didn’t force people to sign.”
No one forced anyone to sign but only a few years ago, anyone calling a housing bubble was labeled as a Chicken Little. Take a look at this PowerPoint from a big housing presentation calling any bubble believers Chicken Little back in October 2005:
Chicken Little Slide from Presentation
Many other quotes, information, and articles can be found at the once great site, David Lereah Watch that is no longer positing since the NAR has replaced Lereah with a new housing bull, Lawrence Yun. These people are important because they are the Chief Economist to one of the, if not, most powerful housing associations in the nation. The NAR has membership of over 1.2 million folks and the majority believe the party line. They have large advertising and marketing campaigns that fund their industry. In addition, these industries are some of largest contributors to both political parties. Do you think they are looking out for you or Mr. John worrying about the risky new buyers coming into his neighborhood?
There is a great article in the Orange County Register that came out August 12 called One street’s subprime struggle. It talks about a block in Santa Ana that is the epitome of the subprime risky mortgage collapse. There is one fantastic quote from one of the older owners who is almost done paying off his mortgage:
“”I never sell. I never refinance,” Zambrano said. “I don’t take money out of my house to buy a car or take a vacation. I’m not stupid.”
Don’t tell that to some folks in the housing syndicate. They may think you have bad money management skills and will try to get you to slap a virtual American Express to the side of your home. Maybe John has a point about being frugal and trying to manage his debt wisely. Should we try to convince Mr. Zambrano about his poor money management ability and tell him about a wonderful HELOC that’ll fund a nice trip to Europe?
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Filed under: Stocks to Buy
Shares of Baidu (NASDAQ: BIDU), the “Chinese Google,” surged after the company reported incredible earnings towards the end of July. To no surprise, the stock flew nearly $30 to $210 per share.
However, shares of the Chinese search leader haven’t been able to hold their ground due to a very weak overall stock market. Consequently, the stock has fallen back to about $190 per share. In my opinion, this pullback has opened the door to an interesting trading opportunity.
For the quarter, the company reported very solid numbers. Revenues easily beat street estimates of $48.4 million by coming in at nearly $53 million. Earnings per share came in at 54 cents vs. Street estimates of 44 cents per share. Active customers grew 42% year over year and 14% since last quarter. All in all, the company performed significantly better than expected and continues to grow incredibly well.
Analysts all seem to agree that the growth in Baidu isn’t done. The internet and paid search markets both remain very young. Credit card penetration and advertising are both expanding and gaining momentum throughout the company. As credit card penetration increases, the eCommerce market stands to begin developing throughout China — a market that has become a very large user of paid search platforms in the United States. According to the company’s management, it only reaches 1% of the addressable market at present — clearly indicating the potential for continued or even accelerating growth.
Over the short term there are several potential catalysts. The company’s instant messaging service, which was recently delayed at the last minute, could launch within the next quarter or two. Simply from judging my dependence on instant messaging, if this product takes off in China it could quickly become a top-line contributor to the company.
In addition, I think there’s a very good chance that the company will beat estimates when it reports third quarter earnings. The company has consistently provided revenue guidance that it has managed to outperform. This quarter’s revenue guidance of roughly $65 million came in well-above prior Street expectations for $59 million. However, even at present, the consensus estimate sits at $64.45 million, below the low-end of the company’s revenue guidance ($64.6 million).
There’s also a longer-term catalyst: success in the company’s Japan project. Although Baidu continues to pour money into this business (7 cents per share last quarter) and will probably continue losing money on the business into next year, the search engine is expected to launch later this year. Generally speaking, analysts haven’t been valuing this business into their price targets. Therefore, any indications that this product is becoming popular or gaining market share in Japan should help Baidu shares as analysts are forced to begin modeling Baidu Japan into their estimates of the company’s value.
Now we get to the hard part: valuing this company. To be honest, I’m not sure what this company is worth and I think the price of the shares is much more dependent on sentiment and news flow than intrinsic value. But I’ve read analyst reports that suggest valuations in the $250 per share range (Citigroup). The value investor in me reads their rationalizations of this target and giggles, but the trader in me says anything is possible.
Whatever the case may be, I’m a believer in the Baidu story and at nearly 15% off its recent highs, I think now could be the time to get involved.
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Filed under: Bad news, Products and services, Consumer experience, Nokia Corp. (NOK)
 If you have a Nokia Corp. (NYSE: NOK) mobile phone, you may want to pay attention to a new battery recall that is affecting a wide range of Nokia cell phones. The company is estimating that some 46 million batteries will be affected by its current recall due to the possibility of overheating while the batteries are charging.
The company is offering to replace batteries free of charge for its customers that have the model BL-5C battery that was manufactured by Matsushita Battery Industrial Co. between Dec. 2005 and Nov. 2006.
So far there have been no injuries reported as a result of the overheating problem, but there have been about 100 complaints globally of batteries overheating while charging. Nokia is careful to point out that the problems are only occurring while the batteries are in the charging process.
So, check out your phones, and see if you have the BL-5C battery and, if so, take the time to stop by your local Nokia dealer and check if you need to get your battery replaced. Even though there are still no injuries, there is no reason to push your luck, take the time to change your battery, it’s just one less thing to worry about!
Michael Fowlkes has worked as a stock trader for seven years and spent the last two years working as an analyst for the online investment advisory service Investor’s Observer.
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Filed under: Bad news, Scandals, Mattel, Inc (MAT)
 For the second time in as many weeks, Mattel Inc. (NYSE: MAT) has issued a recall of Chinese-manufactured toys thanks to the use of lead paint. If ingested, lead paint can lead to illness or developmental problems. The latest recall impacts 7.3 million play sets, including Batman action figures and the latest, disturbingly large (at least, since my childhood) incarnation of Polly Pocket dolls. Additionally, 1.5 million die-cast metal cars are going to be pulled off the shelves.
According to a statement from Nancy A. Nord, acting chairman of the Consumer Product Safety Commission: “The scope of these recalls is intentionally large to prevent any injuries from occurring.”
As BloggingStocks’ Brent Archer noted earlier today, it is “hard to imagine this stock going up by too much over the next few months.” With 80% of all toys sold worldwide made in China, one has to wonder if this is merely the latest in a line of recalls set to come down the pipeline, but one also has to wonder if further complications are already being factored into the shares.
One thing MAT currently has in its corner is its venerability. Today, the company took out full-page ads in The New York Times (NYSE: NYT) and other newspapers, calling itself “one of the most trusted names with parents” and pledging that it will be “working extremely hard to address your concerns and continue creating safe, entertaining toys for you and your children.”
Time will tell if this public relations Hail-Mary will do any good. On a technical basis, Mattel is bouncing off its 80-week moving average, which has served as support for the past 13 months.
Beth Gaston Moon is an analyst at Schaeffer’s Investment Research.
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Filed under: Market matters, Bear Stearns Cos (BSC)
Anyone who hasn’t been cozily sleeping under a rock for the last month is well aware of the recent string of hedge fund blowups and poor performance in the CDO (Collateral Debt Obligation) space attributable to the implosion of the subprime mortgage space. While it is certainly the fault of the fund managers for becoming involved in such a speculative space due to mouthwatering potential returns, there’s also an understated culprit: the ratings agencies.
Ratings agencies essentially determine the riskiness of a given fixed income instrument and, as the name implies, give the security a rating. For example, the theory goes, a C-rated bond is more risky than an A-rated bond. But as Bloomberg has recently reported, these agencies are losing credibility, especially in the credit derivative space.
For example, the article references CPDO funds. Basically these are funds that sell credit default swaps. Credit default swaps are insurance policies on a given fixed income security defaulting. While the ratings agencies have been rating these funds very well (meaning they consider them to be conservative/safe), these funds have dropped 19%-33%. For a product rated AAA (lowest risk) this type of volatility is ridiculous.
Those cited in Bloomberg aren’t the only ones who are growing skeptical of the ratings agencies. In fact, when the Chairman of Bear Stearns (NYSE: BSC) was forced to explain two of the company-owned hedge funds ‘blowing up’ he partially attributed it to poor performance from highly-rated securities.
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Filed under: Earnings reports, Analyst upgrades and downgrades, Technical Analysis, Stocks to Buy
 Stanley Inc. (NYSE: SXE) provides information technology services and solutions to U.S. defense and federal civilian government agencies. The firm offers systems integration solutions and expertise to support mission-essential needs at any stage of program, product development or business lifecycle. Services involve systems engineering, enterprise integration, operational logistics, business process outsourcing, and advanced engineering and technology. The company employs more than 2,800 and operates at over 100 locations worldwide.
Stanley pleased investors earlier in the month, when it announced fiscal Q1 EPS of 23 cents and revenues of $133.5 million. Analysts had been expecting 21 cents and $122.4 million. Management also guided Q2 EPS to 23-25 cents (20 cent consensus), Q2 revenues to $133-$138 million ($122.33M consensus), FY08 EPS to 90-95 cents (85 cent consensus) and FY08 revenues to $525-$540 million ($497.11M consensus). Stifel Nicolaus subsequently reiterated its “buy” recommendation. SXE shares popped on the news and then moved into a bullish “pennant” consolidation pattern. Prices frequently exit pennants moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.
Altogether, brokers now recommend the issue with eight “strong buys” and one “buy.” Analysts see a 22% average annual growth rate, through the next five years. The SXE Price to Sales ratio (1.15), Price to Book ratio (3.47), Sales Growth rate (44.23%) and EPS Growth rate (53.33%) compare favorably with industry, sector and S&P 500 averages. Institutional investors hold about 61% of the outstanding shares. Since going public last October, the stock has traded between $13.41 and $22.84. A stop-loss of $18.50 looks good here.
Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.
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Filed under: EMC Corp (EMC), Initial public offerings
.gif) VMware Inc (NYSE: VMW), the server virtualization software company that EMC Corporation (NYSE: EMC) is selling a chuck of to the public, received a welcome reception from the investment community last night.
The tech offering was priced at $29, at the upper end of its price range of $27 to $29 — which was raised from an initial price range of $23 to $25. The offering was oversubscribed by 25 times, according to news reports.
Technology-land has been without a catalyst for a while. Often tech bull markets start off with a successful IPO that piques investors’ interest. Since private equity will not be driving stocks prices higher, look for IPOs, share buybacks and big dividend increases to continue to drive stock prices higher.
Twenty-five times oversubscribed suggests investors are beginning to get hungry for tech again. This has not happened in the sector in a quite a long time.
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Filed under: Earnings reports, Live coverage, Hewlett-Packard (HPQ)
 Hewlett-Packard Co. (NYSE: HPQ) is set to report Q2 earnings this Thursday at 5 p.m. EST, and the consensus estimates are stating some pretty lofty goals for the world’s largest tech company to hit. Right now, Wall Street has stapled a $0.65 EPS figure on CEO Mark Hurd’s forehead, which represents a 20% YoY gain for the PC and printer manufacturer and marketer. Can it hit this looming and large target Thursday? Stay tuned to BloggingStocks Thursday afternoon and you’ll see it liveblogged right here, along with a bunch of hopefully meaty analyst Q&A as well.
Revenues are expected to be in the range of $23.9 billion to $24.2 billion for the quarter. If HP keeps inline with the growth that many industry pundits expect, it will crack the $100 billion in sales per fiscal year barrier very soon. With all the internal activity HP has generated in the last year (like the Mercury Interactive acquisition), year-ago quarter comps are a little tricky (if even possible), but one thing is clear: HP is doing way more right things under CEO Hurd than wrong things.
In fact, every time I hear Hurd speak on quarterly conference calls, the man seems to have the perfect blend of financial, operational and sales savvy that a $100 billion CEO should have. He exudes cool confidence and you can tell he has all his plays under his jacket at all times, though he does not reveal most of them. I’m quite of the belief that he is the right person to lead HP, and from recent quarterly financial results and guidance, I stand by that opinion. We’ll see if Hurd is further vindicated this Thursday, so be sure and check back at 5 p.m. right here.
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Filed under: Good news, Market matters
 Och-Ziff Capital Management, an asset manager currently in the process of becoming public, seems to be “weathering the storm,” according to DealBook. According to recently-filed paperwork related to the IPO, recent issues facing hedge funds (volatility spike, subprime issues, etc.) “have not materially impacted our funds’ performance.”
This leads me to believe that the funds were either bearish/uninvolved with subprime or they were long subprime but those losses were easily balanced out by some other positions’ gains. Either way, the important thing is that the firm’s funds are alive to trade another day unlike numerous Bear Stearns funds, Sowood, and so on.
It’s refreshing to see the media finally covering some positive hedge fund headlines. I’m aware of many other hedge funds that are still up 6-8% net on the year. As I’ve said in an earlier post, there are two sides to every trade and, as a result, for every fund that is ‘killed’ by something like subprime there is another fund that is prospering due to the panic.
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Filed under: Bargain stocks
Hot Topic Inc (NASDAQ: HOTT), the trendy retailer with a downward trending stock price, announced last night that it is buying back $40 million of stock, roughly 11% of the company’s value.
As we blogged in early July, the retailer is way off from its $30 high and is now selling for $8.15. The sagging stock price has attracted SAC Capital, which accumulated 5.1% of Hot Topic stock, or 2.3 million shares.
We blogged about the merits of bottom fishing in this retailer, but proved a bit early as investors dumped retail stocks on weak economic data and concerns about the subprime market hit the headlines. Hot Topic also got hit due to Take-Two Interactive Software Inc (NASDAQ: TTWO) delaying the launch of Grand Theft Auto 4, as the introduction of new game consoles is thought to have boosted Hot Topic’s results in the past.
Hot Topic has a clean balance sheet and a second concept, Torrid, which provides plus-size fashion-forward apparel and accessories that target young women principally between the ages of 15 and 29, that is doing alright.
Last night’s announcement can be credited to SAC Capital. SAC likes the management of overcapitalized balance sheet to put any excess money to work quickly. The combination of a large share repurchase in addition to a potential turn around of the Hot Topic concept could drive this stock considerably higher in 2008.
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