2008 August 09 | money blog

A Lost Decade of Housing Equity: Los Angeles and Orange County will hit a Housing Price Bottom in May 2011 seeing May 2003 Prices.

09 08 2008

A Lost Decade of Housing Equity: Los Angeles and Orange County will hit a Housing Price Bottom in May 2011 seeing May 2003 Prices.

Posted by: admin in Real-estate news

The California housing market is facing a major calamity. In April of 2007 California reached a peak median price of $597,640 only to see those gains erased in the following year. By June of 2008, the median price in California is hovering at $368,250, a drop of 38.38% with no signs of slowing […]
Related Posts:
■How Many People Overpaid for Their Home in Los Angeles County? Trying to get a Raw Number of Households Underwater.
■Real Homes of Genius: Today we Salute you Santa Monica. 929 Square Feet for $969,000. And You Thought the Bubble was Over.
■Predicting the Housing Future: Los Angeles and Orange Counties. Using the Case-Shiller Index to Find a Bottom.
■Of Bubbles Past. Need a Map for Housing? Ask a Housing Perma-Bull and They’ll See the World Through Colored Glasses!
■Southern California Housing Numbers Exposed: The Bottom Falls out of the Housing Market, Again.

This bottom psychology has also taken hold on Wall Street. There seems to be a new campaign of getting people to jump back in with both fists with the idea that things are hitting a price bottom. This is a mistake. Just because something has become radically “cheaper” in relation to a peak price does not make it worth the current price. There has to be some underlying economic valuation that justifies the price. After all, the recent job report saw unemployment spike up to 5.7% and we also saw our 7th month of continued job losses:

Clearly there will be no second half recovery. In fact, here in California the Governor just signed an order to reduce the wages of 200,000 state employees to the minimum wage and laid off thousands of part-time employees. Do you think this is good for the California housing market? Who will be the future buyers of these homes? When we examine the data we realize that prices have further to come down. I’ll give you five reasons why prices will continue to fall in California:

(1) - State Budget Crisis means higher taxes and spending cuts (a combination of both).

(2) - $300 Billion in Pay Option ARMs set to recast in the state.

(3) - Declining price momentum - 3 measures show prices crashing

(4) - Market psychology. Why buy today when prices will be cheaper tomorrow?

(5) - Real estate prices do not always go up.

The combination of these factors is going to stunt any supposed recovery for the California real estate market. Yet for all the negative news on the economy and housing there will be a housing bottom at a certain point in time. When will housing actually hit a bottom? Some think we are already there. For those that are actually putting their money where their mouth is, there is the real estate futures market. And their bet is that housing for Los Angeles and Orange Counties will not hit a bottom until May of 2011.

For those of you really impatient to get into the market, it does seem that there will be a bottom forming as of the fall of 2009. I went ahead and took the available futures contracts on the Chicago Mercantile Exchange (CME) which are based on the Case-Shiller Index and constructed a chart adding the actual Case-Shiller data and the futures contracts:

What is fascinating by the chart is that most people that are betting on the futures markets do not see a bottom for the Los Angeles index which also includes Orange County until May of 2011. Yet the more fascinating trend is that some are actually betting on a minor summer bounce in 2009. Are people betting on a suckers rally? Maybe.

The index itself isn’t necessarily looking at price but looks at a single home through time in relation to the base year of 2000. So given the bottom number of 152 in May of 2011, the last time the Case-Shiller Index faced that number for LA was in May of 2003.

I’ve collected data for Los Angeles dating back until 2000 so we can then see what the actual median price of a home was at that point in time. According to DataQuick the median price of a Los Angeles County home in May of 2003 was $313,000. Is this far fetched? Not necessarily given that the median price of Los Angeles County is:

CAR data (June 2008): $396,560

DataQuick (June 2008): $415,000

Let us use the $313,000 bottom price and look at the current DataQuick price since it is data from the same measure. The current price of $415,000 would have to drop an additional 24.5% to reach the bottom price of $313,000. If we are to apply this same drop rate for Orange County we get the following:

Orange County Media Price

DataQuick (June 2008): $495,000
Bottom median price: $495,000 and 24.5% correction = $373,725

The rate of decline in price is a fair assessment since Orange County is actually out pacing Los Angeles County in the rate of sales declining and the rate in price change is nearly identical:

June 2008 data

Los Angeles County drop in sales year over year: 25.1%

Orange County drop in sales year over year: 26.9%

LA County year over year median price drop: 23.9%

OC year over year median price drop: 23.3%

Now my assessment is that we will see major abrupt movements to the downside once the pay option ARMs start recasting in fall and winter of this year. These loans are viciously toxic and will prove to be more destructive than people can imagine. If we are to take a look at the WaMu folder and look at recast dates here in California, we get a sampling of what is to come:

That right there is $26.3 billion of the overall $300 billion in loans that will start recasting. In addition, the state unemployment rate is already at 6.9% and given that the Governator just fired thousands of part-time workers, that number will jump. The way employment data is calculated, part-time workers are factored into the overall employment rate even if they are seeking full-time employment and are underemployed. This will bring them onto the books quickly. Now why is this going to prove to be more destructive? Take a look at the recent employment data released on August 1^st:

The only three sectors that saw job growth last month were government, health services, and leisure and hospitality (barely here). Clearly in California job growth via the government won’t be happening with the job cuts and also the Governor has put out hiring freezes. Lesirue and hospitality? Who will be spending when most sectors are contracting?
With this as the backdrop for Los Angeles and Orange Counties, there is no reason to believe that the market will reach a bottom anytime soon. I haven’t seen many articles attempt to pick a bottom but here you have it with actual price points. My guess is even after hitting a bottom, we may see a lost decade similar to Japan where prices simply move sideways for years. Given how our current government is trying to prop up institutions that should collapse, we are going to divert resources to organizations that clearly have mismanaged their own balance sheets. Money that can go elsewhere to improve the overall ability of our society to be competitive in research, infrastructure, and science. This money will now be spent on propping Fannie Mae and Freddie Mac and giving tax breaks for people to buy homes.

Should you buy a home today in Los Angeles County or Orange County? Look at the data above and tell me what you think.

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09 08 2008

Friday Funnies

Posted by: admin in mortgage industry

Courtesy of the Big Picture:

Source [blownmortgage]

09 08 2008

Before the bell: Undecided ahead of GDP: XOM, FSLR, MOT, MO, GM, GOOG …

Posted by: admin in Goog news

Filed under: Before the bell, Earnings reports, Deals, Google (GOOG), Apple Inc (AAPL), Starbucks (SBUX), General Motors (GM), Motorola (MOT), Exxon Mobil (XOM), Market matters, Walt Disney (DIS), Aetna Inc (AET), Altria Group (MO), Kellogg Co (K), MasterCard Inc’A’ (MA), Economic data, Unilever ADR (UL)

U.S. stock futures were mixed Thursday morning ahead of the government preliminary report of U.S. second-quarter gross domestic product to be released at 8:30 a.m. EDT. Compare to the first quarter, where GDP grew at an annual rate of 1%, analysts are expecting an annual growth rate in the second quarter of 2.3% according to Briefing.com. Another wave of earnings will also wash Wall Street over this morning, while it’s still digesting Wednesday’s ones. The market will likely take a clearer direction once GDP is out.

[Update: GDP grew at a 1.9% pace in the second quarter came in well short of the 2.3% forecast. Futures are declining on economy and the XOM miss. Wall Street will likely open significantly lower.]

Reporting/reported this morning:

Exxon Mobil (NYSE: XOM) is expected to report second-quarter earnings before the open. If ConocoPhillips (NYSE: COP) and BP (NYSE: BP) results are any indication, XOM will likely post massive profits thanks to oil’s skyrocketing prices and even break the record it has set for largest profit by a U.S. company. Analyst on average expect Exxon Mobil to earn $2.52 a share on revenue of $144 billion, according to a survey by Thomson Financial.
MasterCard Inc. (NYSE: MA) is expected to report earnings of $2.02 per share.
Kellog (NYSE: K) is expected to post earnings of 81 cents per shares.

Motorola (NYSE: MOT) shares are climbing 4.8% in premarket trading after it posted a small profit as revenue and phone sales beat estimates. Motorola reported a second-quarter profit of $4 million and broke even on a per share basis. Revenue fell to $8.1 billion.
Aetna (NYSE: AET) shares are gaining 1% in premarket trading after the health insurer said its second-quarter profit rose 6.4% on membership growth and a hike in premium rates. The company posted 97 cents earnings per share on revenue of $7.83 billion (a rise of 15%). Analysts polled by Thomson Financial expected profit of 93 cents per share on revenue of about $7.87 billion, on average.
Altria (NYSE: MO) shares are trading 2.7% higher in premarket action after the it said its second-quarter profit fell 58% as it separated its international cigarette unit. Excluding one-time items, profit rose to 46 cents per share. Revenue has risen 4% to $5.05 billion from $4.86 billion. Thomson Financial says analysts expected a profit of 45 cents per share on revenue of $4.17 billion.
Unilever (NYSE: UN, UL) shares are down nearly 9% in premarket trading after the consumer product company said profit declined by almost a fifth while sales dipped 1%.
Royal Dutch Shell (NYSE: RDS.A) reported profit growth of 33%.
Deutsche Bank AG (NYSE: DB) reported bigger-than-estimated 2.3 billion euros ($3.6 billion) of debt writedowns in the second quarter, saying it remains cautious on the rest of the year.

Reported Wednesday after the close:

Starbucks (NASDAQ: SBUX) shares are climbing 4.3% in premarket trading as it beat estimates.
Visa (NYSE: V) shares are also climbing over 3.2% in premarket trading after it topped Street forecast. Visa seems to be counting on international transactions.
First Solar (NASDAQ: FSLR) are up nearly 8% in premarket trading after the solar energy company crushed estimated across the board.
Disney (NYSE: DIS) shares, on the other hand, are down over 2% in premarket trading despite beating estimates. The media conglomerate said it detected slowing growth.

According to the Wall Street Journal General Motors Corp. (NYSE: GM) will cut 5,000 North American white-collar jobs by November 1 as part the plan announced earlier this month to save $10 billion through 2009.

A day after Google Inc. (NASDAQ: GOOG) acquired Omnisio to interact with YouTube, for the Wall Street Journal reported it “is working on plans to start a venture-capital arm, according to several people briefed on the discussions.”

Despite claims of Rogers, sole carrier of Apple (NASDAQ: AAPL) iPhone in Canada it is getting weekly shipments from Apple, sales of the iPhone in Canada are still outpacing supply.

Continue reading Transportation issues will be critical to the health of 21st century U.S. economy

09 08 2008

Transportation issues will be critical to the health of 21st century U.S. economy

Posted by: admin in Stocks Money News

Filed under: Forecasts, Other issues, Politics, Commodities, Oil

Given the smorgasbord of economic demands and concerns — domestic and foreign — likely to face the new U.S. president, investors (and taxpayers) can justifiably ask ‘Where’s all the money going to come from to pay for these programs?’

Legitimate question, but one, for now, we’ll let the political process sort out. (Current Gallup Daily Tracking Poll as of August 6, 2008, for the U.S. presidential election: Obama, 46%, McCain, 44%.)

Electing U.S. Sen. Barack Obama, D-Illinois, or U.S. Sen. John McCain, R-Arizona, will produce different programs and revenue priorities, due to the parties’ different sources of power, but the argument forwarded here is that — regardless of who becomes the new president — the office holder should address transportation in a comprehensive way. Here are the major concern areas:

Mass transit: We’re early into the $4 gas era, of course, but initial U.S. Department of Transportation data indicates Americans are driving less and using mass transit more. The trouble is, many mass transit systems (rail, commuter rail, subway, bus) need to be expanded/upgraded to handle the increased ridership. Bigger, better mass transit systems will save the United States hundreds of billions of dollars in oil costs, not to mention the environmental benefits.

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Continue reading Warner Music Group rocks the analysts, but is it a buy?

09 08 2008

Warner Music Group rocks the analysts, but is it a buy?

Posted by: admin in Stocks Money News

Filed under: Earnings reports, Viacom (VIA), Activision Inc (ATVI)

Warner Music Group (NYSE: WMG) reported third-quarter earnings numbers on Thursday (for more earnings news, see here). Revenues increased a scant 5% to $848 million. The bottom line saw a net loss of 6 cents per share. According to Earnings.com, analysts were expecting a loss of 18 cents per share. So, expectations were soundly beat.

But should investors be completely enamored of the performance? There were some interesting growth rates sprinkled throughout the release. Indeed, digital revenues increased over 39%, and operating income from continuing operations jumped almost 11%. Free cash flow, as defined by the company (management adds back net cash paid or received for investments excluding short-term investments) soared 63% during the quarter, coming in at $93 million. However, during the nine-month period, free cash flow declined 47% to $37 million. Furthermore, net cash from operations decreased 1% and 6% for the third quarter and nine-month period, respectively.

In my opinion, investors should not be completely enamored of the performance. I see a mixed-bag here. I’d need to see some better long-term growth rates in the cash flow, and healthier top-line appreciation, to become intrigued. Warner Music obviously wants to leverage digital revenues as much as possible and adjust to the new landscape that the music business finds itself currently navigating. Interestingly enough, CEO Edgar Bronfman, Jr. is a bit angry at Activision Blizzard’s (NASDAQ: ATVI) Guitar Hero and Viacom’s (NYSE: VIA) Rock Band music-gaming systems. According to this article, the CEO thinks that the song-licensing fees for the games are too low. This, of course, shows just how popular and significant music-gaming has become.

09 08 2008

Before the bell: Undecided ahead of GDP: XOM, FSLR, MOT, MO, GM, GOOG …

Posted by: admin in Goog news

Reporting/reported this morning:

Exxon Mobil (NYSE: XOM) is expected to report second-quarter earnings before the open. If ConocoPhillips (NYSE: COP) and BP (NYSE: BP) results are any indication, XOM will likely post massive profits thanks to oil’s skyrocketing prices and even break the record it has set for largest profit by a U.S. company. Analyst on average expect Exxon Mobil to earn $2.52 a share on revenue of $144 billion, according to a survey by Thomson Financial.
MasterCard Inc. (NYSE: MA) is expected to report earnings of $2.02 per share.
Kellog (NYSE: K) is expected to post earnings of 81 cents per shares.

Motorola (NYSE: MOT) shares are climbing 4.8% in premarket trading after it posted a small profit as revenue and phone sales beat estimates. Motorola reported a second-quarter profit of $4 million and broke even on a per share basis. Revenue fell to $8.1 billion.
Aetna (NYSE: AET) shares are gaining 1% in premarket trading after the health insurer said its second-quarter profit rose 6.4% on membership growth and a hike in premium rates. The company posted 97 cents earnings per share on revenue of $7.83 billion (a rise of 15%). Analysts polled by Thomson Financial expected profit of 93 cents per share on revenue of about $7.87 billion, on average.
Altria (NYSE: MO) shares are trading 2.7% higher in premarket action after the it said its second-quarter profit fell 58% as it separated its international cigarette unit. Excluding one-time items, profit rose to 46 cents per share. Revenue has risen 4% to $5.05 billion from $4.86 billion. Thomson Financial says analysts expected a profit of 45 cents per share on revenue of $4.17 billion.
Unilever (NYSE: UN, UL) shares are down nearly 9% in premarket trading after the consumer product company said profit declined by almost a fifth while sales dipped 1%.
Royal Dutch Shell (NYSE: RDS.A) reported profit growth of 33%.
Deutsche Bank AG (NYSE: DB) reported bigger-than-estimated 2.3 billion euros ($3.6 billion) of debt writedowns in the second quarter, saying it remains cautious on the rest of the year.

Reported Wednesday after the close:

Starbucks (NASDAQ: SBUX) shares are climbing 4.3% in premarket trading as it beat estimates.
Visa (NYSE: V) shares are also climbing over 3.2% in premarket trading after it topped Street forecast. Visa seems to be counting on international transactions.
First Solar (NASDAQ: FSLR) are up nearly 8% in premarket trading after the solar energy company crushed estimated across the board.
Disney (NYSE: DIS) shares, on the other hand, are down over 2% in premarket trading despite beating estimates. The media conglomerate said it detected slowing growth.

Despite claims of Rogers, sole carrier of Apple (NASDAQ: AAPL) iPhone in Canada it is getting weekly shipments from Apple, sales of the iPhone in Canada are still outpacing supply.

09 08 2008

Blackstone goes green

Posted by: admin in Stocks Money News

Filed under: Private equity, Blackstone Group L.P (BX)

With surging energy prices, investors have been pouring huge sums into alternative energy and cleantech deals. For example, according to a recent survey from Ernst & Young/Dow Jones VentureSource, venture capital investments in the category have surged 83% to $961.7 million in Q2.

Well, private equity shops also want some of the action (especially since buyouts continue to remain fairly dormant). That is, the Blackstone Group LP (NYSE: BX) has established its Cleantech Energy Group.

The chief of this division will be James D. Kiggen, who certainly brings some nice credentials. He was the senior vice president at AllianceBernstein L.P, where he analyzed emerging technologies. He also structured investments in a variety of cleantech companies, like A123Systems and Powerspan.

It looks like Kiggen will have a wide mandate. Some of the investment themes include wind power, solar, ethanol, renewables and so on.

In fact, Blackstone has already made some cleantech investments. One example is an investment with Windland Energieerzeugungs GmbH to complete Meerwind, a massive wind farm project in the North Sea. There was also an $870 million deal for a Bujagali hydroelectric power station (late last year).

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.

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09 08 2008

AIG takes $5.4 billion 2nd quarter loss

Posted by: admin in mortgage industry

The worst over? Not so much. AIG took a whopping $5.4 billion dollar loss last quarter related to, you guessed it, mortgage losses and write downs! I’m one big broken record these days, but there’s not much else to say here.

AIG quickly took a nice chunk out of its recently-raised $20 billion as writedowns on mortgage hammered its business.

From Market Watch:

American International Group reported a $5.36 billion second-quarter net loss late Wednesday as the insurance giant was hit again by write-downs and impairments on mortgage-related exposures.

The quarterly net loss included $5.57 billion of unrealized market valuation losses on AIG’s super senior credit default swap portfolio. It also included $6.08 billion of net realized capital losses from its investment portfolio, the company disclosed.

“Our second quarter results were adversely affected by the severe conditions in the housing and credit markets and a very difficult investment environment,” AIG’s new Chief Executive Robert Willumstad said in a statement. “We have a lot of work to do to restore AIG’s profitability to where it should be.”

AIG reported a record quarterly loss earlier this year after suffering huge write-downs on credit exposures. The company quickly raised roughly $20 billion selling new shares and other securities.