Housing Wire reported earlier this week that they had received an advanced draft of California Legislation that would rewrite major sections of the California Financial Code to include eliminating negative amortization loans, stated income loans and put major caps on yield spread premiums, pre-payment penalties and balloon payments.

The sweeping changes, not yet announced on the legislature floor, would dramatically alter the lending landscape in California and set a substantial new precedent for future state and federal regulatory changes.

From the article:

In addition to outlawing option ARM mortgages altogether, the bill would essentially eliminate stated-income lending for high-cost, subprime and non-traditional mortgages — the bill’s language says stated income applications must be “verified,” which really means they aren’t stated at all. The bill would also outlaw YSP as a method of compensation for high-cost, subprime and non-traditional mortgages.

The use of YSP in all other mortgages (including, ostensibly, prime originations) would be limited by establishing a rate ceiling of 200 basis points above par, and only permitting the use of YSP whenever it is the broker’s sole form of compensation on a loan.

For high-cost mortgages in particular, the bill would outlaw balloon payments and prepayment penalties, as well as requiring full borrower documentation. The bill would also require certification of third-party counseling “on the advisability of the loan transaction” from a HUD-approved agency prior to origination.

Better Late then Never?

California has been woeful at addressing the housing boom over the last half-decade.  Content to fill the state coffers with ever-rising property tax assesments, the state has done little to curb illegal lending and to enforce the existing real estate and finance law.  As we reported last year the state’s department of real estate employed a 33-person regulatory team to handle more than 500,000 real estate licensees (in California a licensee can sell real estate as well as originate and fund mortgage loans).

Now that the tide has turned they are apparently trying to launch the most comprehensive reform in the country.  Of course, this reform could only be supported by a massive surge in enforcement funding; and with the state looking at massive debt issues already, the likelihood of seeing ample enforcement for this type of initiative seems scant at best.

Revisions to New Mortgage Legislation are a Given

It is probably safe to say that a law as sweeping as the one proposed will be emasculated by various special-interest lobbies and assemblymen with ties to financial institutions; however, there is some precedent for the elimination of stated income loans in Minnesota and Colorado that may get that piece through.  Undoubtedly this legislation will get through in one form or another as legislators from the heavily-affected areas of the state will want to do “something.”

More Pain for the California Housing Market

What is for certain is that passage of this type of legislation will exacerbate the fall of California real estate value - steepening the slope of its current decline.  In a state where Countrywide and other lenders have underwritten the bulk of their option arm and stated income mortgages eliminating those products would further reduce the qualified buying pool of people able to afford the inflated prices seen throughout the state.

It would also cut off refinance options for people in those loan types when they begin to “explode” at the end of their teaser-rate and neg-am terms on their current loans.  Even with some mitigation via the increased federal conforming loan amount and FHA programs a large portion of homeowners in these type of loans will not be able to qualify for new financing under these new guidelines.

This can only portend more pain for the California housing market.

A Needed Change?

There is no doubt that some curbing of the lending practices in California is required; however, legislation like this will send the market reeling.  It is incumbent upon legislators to look closely at all laws enacted to ensure that existing laws that are on the books are inadequate to meet the demands of there new requirements.  I personally believe that many of the existing laws could handle the majority of the abuses we’ve seen over the last boom with proper enforcement.  It is shameful that a state with 500,000 licensees has a regulatory staff of 33.  We’ll see how the new bill addresses enforcement.

Federal Institutions Affected?

Of course the state-licensed folks first question will be “what about the federally chartered banks?”  Housing Wire doesn’t address the topic in their article; but I would imagine that federal institutions would claim exemption under superceding federal laws.  As brokers and mortgage banks peter-out; a sweeping reform such as this one without concomitnat impact on federal entities would further tip the balance of power to the big banks.

If the new bill goes for all funding in the state regardless of entity the next question will become reporting requirements and other mandated expenses to stay in compliance with new laws.  It’s anyone’s guess at this point.

Stay Tuned

No doubt, this bill will get plenty of attention when brought to the state senate floor.  We’ll be on top of it as its implications go far beyond lending in California.  They could certainly set the stage for lending regulation across the country.

Share This

Share This

Filed under: Google (GOOG), Adobe Systems (ADBE), Red Hat Inc (RHT), salesforce.com inc (CRM)

Last week Forbes released its annual list of the fastest growing tech stocks, and it shouldn’t be much of a surprise that Google Inc. (NASDAQ: GOOG) topped the list, with nearly $15 billion in sales, representing five-year sales growth of 155%, and 30% EPS growth. To make the list, companies had to have significant sales growth over the past year and five years, as well as a good earnings forecast for the next three to five years. Companies with significant legal problems or corporate governance issues were excluded.

Rounding out the top five were Salesforce.com (NYSE: CRM), Ceradyne Inc. (NASDAQ: CRDN), Euronet Worldwide Inc. (NASDAQ: EEFT), and FalconStor Software Inc. (NASDAQ: FALC). Some other familiar names that made the list this year include Red Hat Inc. (NYSE: RHT), L-3 Communications (NYSE: LLL), Adobe Systems Inc. (NASDAQ: ADBE), and Cognizant Technology Solutions (NASDAQ: CTSH). Cognizant has been on Forbes list since its inauguration six years ago. For the full list, see the Forbes article.

Also of interest was the Forbes Fast 15, companies that didn’t make the list mentioned above, but which Forbes thought were worth keeping an eye on for their potential. Engineering software maker Ansys Inc. (NASDAQ: ANSS), semiconductor maker Atheros Communications Inc. (NASDAQ: ATHR), Brubaker BioSciences Corp. (NASDAQ: BRKR), and scoreboard maker Daktronics Inc. (NASDAQ: DAKT) top that list. For the full list, see the Forbes article.

So if, like Aaron Katsman, Georges Yared, and Jim Cramer, you are bullish on tech stocks, then there’s plenty on the Forbes lists worth taking a look at.

Permalink | Email this | Linking Blogs | Comments

Share This

Filed under: Personal finance, Bargain stocks

Many sports fans are in a state of withdrawal, as they suffer through the first Sunday without football in months. The question becomes what to do? You could hang out with your wife and try to communicate with her! Well it’s just a thought.

If you have 9 or 10 hours with nothing to do, try doing some research on this stock:

Dover Corp. (NYSE: DOV) manufactures industrial products and components, and manufacturing equipment in the United States and internationally. It operates in four segments: Electronic Technologies, Engineered Systems, Industrial Products, and Fluid Management. The stock recently appeared on one of my stock selection screens. It has a yield of 2.%, and is trading at a PEG of just 0.77. The company is still producing double-digit earnings growth, and with the economy looking to start picking up in a quarter, this looks interesting.

Don’t fret, Super Bowl is next week, and then there is always the Pro Bowl if you get desperate!

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer has no position in any stock mentioned as of 1/27/08

Permalink | Email this | Comments

Share This

Filed under: Management, Sears Holdings (SHLD)

Quoted in a piece in the Sunday New York Times, Bruce Greenwald (author of the terrific Value Investing: From Graham to Buffett and Beyond) sums up Eddie Lampert’s problems at Sears Holdings (NYSE: SHLD) beautifully: “He did really well on Autozone. Most of his stocks are retail stocks, and he has done really well with them. So he decided he was a genius at retail, and it didn’t occur to him he could be wrong about it. He believed his own press.”

I would argue that the problem might even run deeper than that: Lampert wanted to be seen, and to see himself, as more than just a great investor. He wanted to become a great manager.

It’s somewhat similar to former all-star slugger Jose Canseco, who decided he wanted to try pitching. He promptly injured his arm and missed the rest of the season. His attempt at pitching hurt him as a hitter.

Lampert’s fall from grace has been steep and rapid. We used to talk about how shares of Sears were trading at a “Lampert premium,” based on the idea that his investment prowess would lead to great returns on capital for the struggling retailer.

Now, with Herb Greenberg recently having named him the worst CEO of 2007, shares of Sears are trading at a Lampert discount and are, according to many, currently valued at well below the company’s break-up value. There may be value to be had in Sears, but Lampert’s struggles provide an important lesson for investors: great investors aren’t necessarily great managers, but, like Carl Icahn did with TWA, they might not be able to help themselves from giving it a try.

Read | Permalink | Email this | Comments

Share This

Filed under: Microsoft (MSFT), Wal-Mart (WMT), Sears Holdings (SHLD)

I wrote a couple weeks ago about a very serious issue with Sears.com’s privacy policy. It seemed that Sears Holding Corp. (NASDAQ: SHLD) had a major issue with their online offering. Sears has finally taken the issue seriously and disabled the bug in their how-to-figure-out-how-much-your-next-door-neighbor-paid-for-his-plasma-TV search function on the Sears website.

This morning, WSJ.com reports (subscription required) that an ex-Microsoft (NASDAQ: MSFT) executive is being appointed head of Sears’ newly formed online division, one of five such divisions the retailer is forming as part of a turnaround. The article says that James Barr, a 12-year Microsoft executive and general manager of MSN Shopping and Marketplaces, will take over the online unit effective Feb. 2 as a senior vice president of Sears Holdings.

Barr joins former Walmart.com executive, Neil Day, the newly-named Chief Technology Officer for the Sears.com group.

These changes are being made by Chairman Eddie Lampert as he tries to boost sales and stave off further profit losses.

It appears one of my personal favorites, LandsEnd’s, LandsEnd.com, will not be part of this unit, which will include Kmart.com and Sears.com.

Zack Miller is the Managing Editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund. Author holds no positions in stocks mentioned above.

Permalink | Email this | Comments

Share This

Filed under: Deals, Press releases, Israel

The news today the Israeli defense company Elbit Systems (NASDAQ: ESLT) signed a $40 million deal with the Royal Netherlands Army (RNLA) is not just the latest in a string of new deals for Elbit, but could help the company penetrate the NATO countries as well.

Elbit Systems will supply systems to the RNLA’s ground forces that will include enhanced tactical computers (ETCs), incorporating tactical communication devices, and data communication software. The systems will be installed in more then 1,800 of the RNLA’s vehicles, including tanks, armoured vehicles, and others. The project involves extensive cooperation with the Netherlands MoD’s C2 Support Centre.

Commenting on the deal, Bezhalel Machlis, Corporate VP & General Manager Land Systems & C4I Division, Elbit Systems said: “Winning the tender to supply Battlefield Management Systems to the Netherlands MoD constitutes another step in establishing our position as leader in the C4I fast growing and developing market. Elbit Systems’ BMS systems are in use today by over 20 militaries worldwide and we view this contract awarded by the Netherlands MoD, a leading country in NATO, as a springboard to potential future business in this market.”

Elbit has been signing deals all over the place, but if they can crack NATO member countries defense budgets, this stock will soar higher.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer has a position and is long ESLT. He has no positions in any other stock mentioned as of 1/27/08

Read | Permalink | Email this | Comments

Share This

Filed under: SEC filings, Newspapers, New York Times’A’ (NYT)

The newspaper industry has been struggling of late, battling online classified sites, job listings, and free blogs. While readership of offline paper has been steadily decreasing, readers have been drawn more and more to the online versions of newspapers.

Last Thursday, Reuters published the results of a recent study from the Newspaper Association of America reporting the number of unique visitors to newspaper websites last year rose more than 6% to a monthly average of 60 million.

So, it’s not surprising to see that one hedge fund in particular is reported to be readying itself for a proxy battle to make a move for the New York Times Co. (NYSE: NYT). Marketwatch reports that the New York Times has said that Harbinger Capital Partners Master Fund has recently informed them of plans to seek seats on their board.

Continue reading Harbinger Capital fund sets its sights on the NY Times

Permalink | Email this | Comments

Share This

Filed under: Deals, Personal finance

HJ Heinz Co. (NYSE: HNZ) should have really strong sales this week leading up to Sunday’s Super Bowl. With more interest this year than in any Super Bowl in recent memory, with the two storylines of the Patriots trying to run the table, and a New York team in the big game, not only should TV ratings skyrocket, but I would expect the number of Super Bowl parties to be up as well. Clearly that will benefit the condiment maker.

Heinz is trading toward the bottom of its 52-week range and sports a yield of over 3%. What makes this even more interesting is that investing guru Nelson Peltz owns a share. About two months ago, Peltz filed a prospectus for the $750 million initial public offering of a special purpose acquisition company (SPAC). Due to the ways SPACs are set up, he will need to make some kind of acquisition, and that deal may just be Heinz.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer has no position in any stock mentioned as of 1/27/08

Permalink | Email this | Comments

Share This

Filed under: Scandals

In a piece that will likely have reverberations in Monday’s trading session, this week’s Barron’s raises questions (subscription required) about Systemax’s (NYSE: SYX) accounting for rebates and possible disclosures at the computer maker that recently agreed to acquire CompUSA.

Consumers have been complaining loudly about TigerDirect, which is owned by Systemax, and its failure to pay the rebates on products it sells. TigerDirect accounts for more than 90% of the company’s revenue.

Systemax declined to speak with the weekly, but according to the article, “The complaints fill Internet discussion forums, customer lawsuits and now, an active investigation by Florida’s attorney general. Port Washington, N.Y.-based Systemax, however, has told investors nothing of this rebate ruckus. That’s a shame, given that those disputed rebates might partly account for the unusually fat gross-profit margins shown by the company: At 16%, the gross margins are four or five percentage points higher than those of peers.”

Barron’s wonders whether the company should be disclosing the rebate mess in its SEC filings. It’s hard to know what to make of Systemax’s unwillingness to speak with Barron’s — perhaps they’ll respond publicly if their stock gets knocked down on Monday.

Definitely a very interesting piece of reporting from Barron’s, one of the few media outlets that still bothers to cover stuff like this.

Permalink | Email this | Comments

Share This

Filed under: Indices, Personal finance

With treasury yields well below 4%, and even decent corporate paper not yielding much better, the question I keep hearing from my elderly clients who live off of their investment income is where are they going to get the income needed to meet their expenses. Thrown into the mix that, in four years million and millions of baby boomers are set to retire, so they will also need to start adjusting their portfolios to be more income oriented. I anticipate that we will see continued demand for high-rated bonds ,and as such I can’t imagine that we will see yields back above 6% on good corporates.

What to do? The answer to that question is more involved than this space permits, but take a look at preferred stock to help supplement income. My buddy, Zack Miller had a nice post about this a while back. The problem with preferred stocks is that it’s hard to get information on each issue and the terms of the issue. Also, liquidity can be an issue. That’s why I like the POWERSHARES ETF TRUST (AMEX: PGF). The ETF is well diversified as it holds about 28 issues. More important is that it is yielding a shade under 7%. With preferreds having been slammed over the last few months, there may be some opportunity for some capital gains as well.

Living off fixed income. Check out preferred stocks.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer has a position and is long PGF. He has no positions in any stock mentioned as of 1/27/08

Permalink | Email this | Comments

Share This