Archive for August 31st, 2007
What an interesting week. As Rome burns and the political syndicates offer every possible option of bailing out the rouge gamblers and maverick flippers, they fail once again to highlight the nucleus of this bubble. Forget that the Bush Administration is offering a bailout plan even after he said they would do nothing last week. Pay no attention to the Fed with their implied wink-wink posturing that they will lower rates. So what. Homes are so overpriced in nearly every metro area in the country that they can drop rates to 0 and it still won’t make sense to buy because prices are out of line with local household incomes. Would you like to buy a beat up Ford Pinto for $30,000 simply because the interest rate is 0 percent? Apparently this is happening with all these Real Homes of Genius we are seeing. You may think that we are grabbing at low hanging fruit. But these homes are priced from $300,000 to $500,000+ in lower to middle income areas. Last time I checked, $500,000 was no low hanging fruit. So as the media is doing a Pavlovian response to an implied bailout, the fact is nothing can bail out an overpriced home by someone that simply cannot afford the payments. And to show you this, we are going to include higher priced homes in Los Angeles County to drive home the point that in EACH of the 88 cities in our county, prices do not make any economic sense. Today we will shine our flashlight on Cerritos. A middle to upper-middle class area in Los Angeles County. It is with great honor that we salute you Cerritos, with today’s Real Home of Genius.
Today’s home is what one would expect as a starter home for a professional family in Los Angeles County. A safe area, good schools, and a place one would probably like to raise a family. This home is over 2,000+ square feet, has 4 bedrooms and 3 bathrooms. Nothing spectacular. So what was this home initially listed for? Well someone actually thought that we were still in 2006 and listed this place for $778,000. Apparently there are no takers at this price. Let us take a look at the pricing action on this home:
Price Reduced: 08/02/07 — $778,000 to $759,000
Price Reduced: 08/17/07 — $759,000 to $739,900
Clearly not many people were biting at $778,000, or looking at it from another perspective, $200,000 away from $1 freaking million dollars! This is a four bedroom home in a middle to upper-middle class neighborhood. This isn’t Atherton or Beverly Hills. Before you shed a tear for this seller and bring out the violin, let us take a look at the previous sales history on this home:
Sale History
10/04/2002: $430,000
12/24/1998: $275,000
So even at the current sales price, these sellers are looking to come away with a $300,000 profit in 5 years. Since real estate over the long-term has followed in line with inflation, how would the price for this home look like if we followed a 5 percent annual increase starting in 1998?
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5 Percent Increase
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Current Sales
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Difference
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1998
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$275,000.00
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$275,000.00
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base year
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1999
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$288,750.00
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2000
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$303,187.50
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2001
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$318,346.88
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2002
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$334,264.22
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$430,000.00
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$95,736.00
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2003
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$350,977.43
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2004
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$368,526.30
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2005
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$386,952.62
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2006
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$406,300.25
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2007
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$426,615.26
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$739,000.00
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$312,385.00
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So already with the sale in 2002, using 1998 as our base year the home at a 5 percent inflation rate is over the baseline by $95,736. Keep in mind the government data police are constantly telling us inflation is at 3 or 4 percent so we are being overly generous with 5 percent. If we continue with the trend, once we reach our current date of TODAY, we are now off by $312,385. Almost double what the inflation adjusted price should be. So this is back of the napkin math Dr. Housing Bubble; I’m sure people in Cerritos make $300,000 per year to justify these prices. Well let us take a look at the current average annual household income:
Average household income: $89,391
Not bad. A lot better then the $50,000 average we find for other Real Homes of Genius areas. But let us run a hypothetical scenario of a current family making the average income buying this home:
Monthly Net Income After Taxes: $5,603 (Filing as married with 2 exemptions)
PITI: $5,193 (10 percent down and current jumbo rates)
So this family is left with $410 disposable income each month. Bwahaha! Absurd. It is such a joke that these financial institutions, politicians, and other renegade zealots of housing are trying to keep this game going. Tax breaks for short-sales. Subprime support. GSEs being able to refinance mortgages into current FHA products. Are you kidding me? This may help people with subprime loans in areas where home prices are $250,000 or less. People can’t afford homes at current prices in Los Angeles without voodoo mortgages. The only way this game will keep going is if the subprime market opens up again. Now who is going to finance these high-wire mortgages? Doesn’t seem like Wall Street wants anymore. The government can only do so much with FHA loans and besides; the Fed has already stated they won’t lift caps. So that pretty much puts a plug on California since the entire region is jumbo-exotic-mortgage territory. Notice how politicians aren’t talking about bailing out people in Florida or California specifically? They are casting a wide enough net and when you dig into the details, the train is still coming. All these bandaids are simply that, a patch on a bigger problem.
They can jawbone all they want with Pollyanna projections and we’ll keep on showing how overpriced and absurd this market is and why foreclosures are exponentially growing. I’m keeping my eye on short-sales and foreclosures and each week, the numbers are consistently going up. The party is over and as much as they want this game to go on, nothing short of sucking the last drop of energy out of the dollar (which they may do since they don’t care about fiscal responsibility obviously) will rescue this defunct mission. Housing is going to stay in a bear market for years in California. Why? Because like Bob Parker would say, the price isn’t right.
Today we salute you Cerritos with our Real Home of Genius Award.
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Filed under: Bad news, Products and services, General Electric (GE), Walt Disney (DIS), CBS Corp ‘B’ (CBS)
The Writers Guild of America has threatened to go on strike when its contract expires on November 1. Variety reports that Walt Disney’s ABC (NYSE: DIS), General Electric (NYSE: GE)’s NBC and CBS (NYSE: CBS) are scouring the world for possible replacement entertainment. (I stop here for a moment to ask: Are there actual writers involved in shows such as American Idol and Survivor?)
Among the places the networks are looking are cable channels, where a great deal of content specifically produced for cable networks could be rebroadcast to a much larger audience. Shows such as The Closer (TNT), Battlestar Galactica (SFN), and Dog: The Bounty Hunter (A&E) have pulled in enough numbers to suggest they might keep the networks’ sponsors from storming their headquarters with axes and torches.
The big three are casting their nets even wider, looking to other countries for content. A great many Canadian CBC shows (not more Red Green show, please!) don’t run on U.S. television, so shows like its hit Little Mosque on the Prairie could take the place of Desperate Housewives.
Long a staple of PBS, more British shows could also find their way to network television. Many will be very familiar, as Hollywood has found a rich vein by stealing mining England’s entertainment, including The Office and American Idol.
The industry is in the midst of changing how audiences are measured and ad charges calculated, so this will be a dicey time for anything that will disrupt the broadcast routine. I, on the other hand, am looking forward to watching Fawlty Towers in prime time.
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Filed under: Market matters, Sears Holdings (SHLD), Rich in America, Personal finance
 After years of profiting from specialized technology and internet concerns, our hypothetical investor returned to basics for 2004. The best-performing stock that election year was Sears Holdings (NASDAQ: SHLD), the nation’s fourth-largest retailer, trailing in size only to Wal-Mart Stores (NYSE: WMT), Home Depot (NYSE: HD), and Kroger (NYSE: KR). At the beginning of the year, $43,270,538 was invested in 1,810,483 SHLD shares.
2004 was a pivotal year for Sears as well. In November, the Chicago-based retailing chain announced plans to scoop up the beleaguered Kmart brand. This news helped move even more buying power into Sears shares, which were already enjoying a steady uptrend throughout the year. Though the stock peaked in mid-November, it retained enough of its gains to emerge as the year’s winner.
The retailing name ended 2004 at $98.95, up 314% for the year. The portfolio’s value was now up to $179,147,269.
Next: Step 9: SanDisk (SNDK), 2005
Beth Gaston Moon is an analyst at Schaeffer’s Investment Research.
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Filed under: Newsletters, Technical Analysis, Crocs Inc (CROX), Bargain stocks, Stocks to Buy
“It’s time to get back to basics; return to those things that everyone still needs regardless of what the stock market is doing,” says Jocelynn Drake. “And everyone needs shoes, right?”
The analyst with Schaeffer’s Investment Research notes, “Several stocks have managed to weather the storm with remarkable resilience. And a pair of those outperformers is in the footwear sector: Crocs (NASDAQ: CROX) and Deckers Outdoor (NASDAQ: DECK).
Crocs, she explains, is known for its colorful slip-on shoes that are made of a proprietary closed-cell resin. She observes, “The security has staged a stellar rally this year, gaining nearly 139% since the start of 2007.”
What’s more, she adds, the shares of Crocs have marched steadily higher along their 10-week and 20-week moving averages since late July 2006. From a sentiment standpoint, she points out that short sellers are attempting to call a top to the trendy shoemaker’s uptrend.
Continue reading Crocs (CROX) and Deckers (DECK): An outperforming ‘pair’
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Filed under: Bad news, General Motors (GM)
As Doug wrote on yesterday, General Motors Corp. (NYSE: GM) again reduced plans for truck production for the third time in the last month and a half yesterday, which tells me that the road ahead for the automaker in one of its most profitable vehicle lines is not going to be smooth at all. The automaker already told the world about reducing production at six U.S. plants, and now newly stoked fears about a slowing U.S. economy has the automaker in a whirlwind about possible truck excess inventory. How is one of GM’s best-selling lines just sitting idle on dealer lots across the nation?
It’s like this: demand creeps downward and the automaker reduces production in order to balance existing and in-work inventory with dealer sales expectations. Nothing new there — but in this case, it’s a staple of GM’s entire lineup, not some odd-designed passenger car that did not take off with consumers. Did GM just try to stuff the dealer channel with more profitable vehicles here, and it finally caught up with them? Is the company’s truck marketing failing somehow? To see GM’s idle truck-building capacity like this is very strange.
Let’s go further: does GM continually see U.S. truck sales declining over the next few years? While rightsizing is probably the correct thing to do here to some extent, where is the slack demand for pickups falling? To the competition’s trucks or to larger cars and SUVs? That question depends on whether GM sees retail or fleet sales dropping (or both). Once the conference call to cover August U.S. sales happens next week after the holiday, we’ll form a better picture then on what is inside GM’s thinking here. I’ll be liveblogging it this Tuesday at 2pm EST, so stay tuned to BloggingStocks at that time.
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Filed under: Target Corp. (TGT), Options, Technical Analysis, Economic data
 Billionaire investor Warren Buffett unloaded all of his Target Corp. (NYSE: TGT) shares at the end of 2006 when the stock was trading in the upper 50’s, indicating that the investing guru does not see significant growth potential in this stock looking forward. He also got rid of Ameriprise (NYSE: AMP), H&R Block (NYSE: HRB), and Pier One Imports (NYSE: PIR), which indicates he may have forseen our current market jitters. If you think that his actions mean that Target won’t go too much higher in the near future, then it might be a good time to consider a bear-call credit spread on TGT.
After hitting a one-year high of $70.75 in July, the stock has fallen back down near previous trading levels over the past few weeks. This morning, TGT opened at $64.73 on good consumer spending numbers. So far today the stock has hit a low of $64.40 and a high of $66.15. As of 11:15, TGT is trading at $64.87, up $1.04 (1.6%). The chart for TGT looks bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bearish hedged play on this stock, I would consider an October bear-call credit spread above the $75 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn’t do what you think but still leverage nice returns. For this particular trade, we will make a 5.3% return in seven weeks as long as TGT is below $75 at October expiration. Marvell would have to rise by more than 26% before we would start to lose money. Learn more about this type of trade here.
TGT has never been above $75 (or $71 for that matter) and has shown some resistance around $66 recently. This trade could be risky if the retail sector gets a boost from back-to-school, but even if that happens, this position could be protected by strong resistance shown around $70 where the stock topped out back in July. Plus TGT isn’t set to report earnings until after October expiration on November 20th.
Brent Archer is an options analyst and writer at Investors Observer.
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Filed under: Market matters, Money and Finance Today, Economic data, Headline news
In a speech today in the Kansas City Fed’s Jackson Hole, Wyoming conference on Housing, Housing Finance, and Monetary Policy, Chairman Ben Bernanke addressed the current credit crisis and gave some guidance about the Fed’s actions in response to it.
He indicated that the Fed will “act as needed” to prevent the credit crisis from damaging the economy. In addition, the Fed will be focusing on the “timeliest indicators” as to the state of the economy and indicated the limited usefulness of data from periods prior to the crisis.
At the same time, Chairman Bernanke indicated that “It is not the responsibility of the Federal Reserve-nor would it be appropriate- to protect lenders and investors from the consequences of their financial decisions.” This is consistent with his prior statements.
The speech gives the Fed and Bernanke more wiggle room to cut rates if they feels that it has become a necessary step to deal with the crisis. In essence, the Fed is no longer limited by economic data prior to the August crisis period and can rely much more on its own forecasts.
If the need arises, the Fed can easily cut its Fed Funds rate at the September meeting. However, this action is not guaranteed. The Fed seems to be adopting a wait-and-see attitude with the ability to move quickly if necessary.
Those expecting a bailout like the one in 1998 with a substantial decrease in the Fed Funds Rate may be disappointed. The Fed seems to be implying that this will not occur unless there is a major deterioration in the economy or the credit crunch worsens. The Fed Chairman wanted to assure the market that he will not allow the situation to spiral out of control, and the speech seems to have accomplished this purpose.
Doug Roberts is the Founder and Chief Investment Strategist for FollowtheFed.com. He previously held executive positions at Morgan Stanley Group and Sanford C. Bernstein & Co.
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Filed under: Law, Scandals
Four years ago, Frank Quattrone, head of the technology investment banking group at Credit Suisse First Boston was indicted for for obstructing justice and witness tampering. The Feds wanted to know if the bank had given certain clients preferential treatment and felt that Quattrone had asked some of his people to hide evidence.
Quattrone then went through a series of prosecutions: One ended in a mistrial, he was convicted in another case, but that was overturned on appeal and eventually prosecutors settled for a deal where the banker said he would keep his nose clean for a year. According to San Jose Mercury News: “Quattrone’s only obligation under the deferred prosecution agreement was to stay out of trouble and keep the court advised of his movements.”
He kept his part of the bargain and yesterday that year of good behavior ended. The charges against him are now history.
There is a clear temptation to say that Quattrone bought himself a good deal because he had millions of dollars to pay for lawyers, money that is not available to all defendants. But, others, from Enron management to Conrad Black, have also had cash for big defenses and lost.
Quattrone was able to hold his own. He almost certainly has a fairly good case as judges and juries are not jabbering dupes. At least not all of them.
Quattrone cannot escape the stigma of being prosecuted, but perhaps he will now do something that will, in the eyes of the media and Wall Street, make the finale seem fair. He says he has big plans.
Douglas A. McIntyre is a partner at 24/7 Wall St.
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Filed under: Good news, Launches, Competitive strategy, Apple Inc (AAPL), Amazon.com (AMZN), Options, Technical Analysis
 Amazon.com Inc. (NASDAQ: AMZN) shares are jumping today after a report that the company plans to launch an online music service in September as an alternative to Apple’s (NASDAQ: AAPL) popular iTunes mp3 store. If you think this means good times for the company, then now could be a good time to look at a bullish hedged trade on AMZN.
After hitting a one-year high of $89.00 in July, shares have trickled downward over the last month. AMZN opened this morning at $80.00. So far today the stock has hit a low of $79.70 and a high of $80.49. As of 11:00, AMZN is trading at $80.40, up $1.72 (2.2%). The chart for AMZN looks bullish but deteriorating, while S&P gives the stock a negative 2 STARS (out of 5) sell rating.
For a bullish hedged play on this stock, I would consider an October bull-put credit spread below the $67.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn’t do what you think but still leverage nice returns. For this particular trade, we will make an 8.7% return in just 7 weeks as long as AMZN is above $67.50 at October expiration. Amazon would have to fall by more than 16% before we would start to lose money.
AMZN hasn’t been below $67.50 at all in the past year and has shown support around $77.50 recently. This trade could be risky if the company’s earnings (due in late October) disappoint, but even if that happens, this position could be protected by multiple levels of support between $68 and $72, plus the stock’s 50-day moving average, which is around $75 and rising.
Brent Archer is an options analyst and writer at Investors Observer.
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Filed under: Market matters, Rich in America, Akamai Technologies (AKAM), Personal finance
 Moving toward the light at the end of the bear-market tunnel, our hypothetical investor begins 2003 with more than $7.2 million to invest in what will grow to become that year’s top-performing equity, Akamai Technologies (NASDAQ: AKAM), an internet hosting concern founded in 1998. Shortly after a well-received initial public offering in late 1999, AKAM shares took quite a beating, falling from a post-IPO high of $345.50 to rock bottom in October 2002, when the stock was trading at 56 cents per share.
By January 2, 2003, AKAM had worked its way up to $1.80. With the funds in our portfolio, 4,007,600 shares were purchased. A fall rally helped take the shares to $10.76, bringing them high enough to close at the top spot, with a gain of 498%. The portfolio ended 2003 with a value of $43,270,538. Was a billion as far off as it seemed? We were a long way from our original $100, but still far off the mark from the threshold separating us from the Oprahs and Warrens of the world.
Next: Step 8: Sears Holdings (SHLD), 2004
Beth Gaston Moon is an analyst at Schaeffer’s Investment Research.
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