Trouble on the Home Front

[nodoodahs]

Yep, that's the idea. Let the discretion be in the system design and make the execution as discretion-free as possible.

I'm not tracking the value system or the garp system right now. They tested well, but not quite well enough to make the cut. Maybe I could tweak a value system to make it into the top three, but I'm not actively pushing for it right now.

Fundamental doesn't look at price ratios, so it will not "care" whether the stocks are cheap, just that they meet the other criteria: growth, clean cash flow statements, high ROE, minimum market cap.

Timing doesn't do stock selection.

The other two methods will be up on the new site by the end of the month.

[late edit: it's not just the top three trading systems + a timing system, it's the top system that is lower-turnover and focused primarily on fundamental data, the top system that is aggressive with high turnover, the top system that is global and diversified, and the timing system.]
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He was wearing my Harvard tie. Can you believe it? My Harvard tie. Like oh, sure, HE went to Harvard.

[HenryTo]

Guys,

Let me take a stab at this from a fundamental standpoint and utilizing past US housing trends as a basis, if you don't mind.

There are four measures that we can look at as a bottoming indicator - three of them involve housing activity and the remaining one based on price action. Let us start with the first three:

1) According to GaveKal, the average residential investment as a % of GDP from 1957 to 2007 was about 4.65%. At the most recent peak in late 2005, this % rose to as high as 6.3%. Today, we are at 4.5%, just slightly below the 50-year average. At the last trough in late 1990/early 1991, this % declined to as low as 3.4%.

2) From 1950 to 2007, average housing starts were 1.5 million a year. At the most recent peak in late 2005, housing starts rose to as high as 2.2 million. Latest numbers over the last few months have this number averaging around 1.25 million. At the last trough in late 1990/early 1991, housing starts declined to as low as 900,000.

3) Construction employment as a total of non-farm employment is currently around 5.5%. At the most recent peak in early 2006, this rose to about 5.65%. At the last trough in early 1992, this declined to about 4.2%. Note that this is a lagging indicator, however.

4) Taking 1989 as a baseline (base value = 100), the relative value of the S&P 500 homebuilders index vs. the S&P 500 has fluctuated from 40 (early 2000) to 400 (mid 2005) over the last 18 years. We're just now at about 100, i.e. the baseline. Excluding the period after 2003, the relative value of the S&P 500 homebuilders index vs. the S&P 500 has averaged 100. In other words, from 1989 to 2003, the returns of the homebuilders have been about the same as the returns of the S&P 500.

Taking all the above into account, my guess is that we have not seen the bottom yet. Also, my guess is that we would not see a bottom until we have seen a major bankruptcy in the industry. e.g. Bankruptcy of Worldcom and Global Crossing in 2002, and those of Northwest and Delta airlines in October 2002. The former signaled the bottom of the telecomes and the latter the airlines. When that comes, you will need to just "hold your nose" and buy. For those who don't want to do much fundamental analysis, I would just suggest the XHB.

If I have to guess, I would say at least 25% lower for the XHB and possibly 50%.

Best regards,

Henry

[HenryTo]

A Beazer bankruptcy (given its significant cash flow problems) could be the catalyst for a "capitulation bottom" that we've been looking for. This is news from November 10th - not sure why we didn't catch this earlier:

http://www.topix.net/content/kri/2007/11/beazer-to-delay-some-payouts

[rffrydr]

That's a pretty fair fall for something so central to our economy:

http://stocks.us.reuters.com/stocks/overview.asp?symbol=.MFX


And so the market turns:

http://www.theolympian.com/business/story/268314.html

http://www.nytimes.com/2007/11/04/realestate/04cov.html?_r=1&oref=slogin
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

That is an enticing theory, and is one which we have been concerned about. The $64 billion question is if this theory will also hold up in a major UK and Western European housing bust/slowing economy. Also, according to the OECD leading economic indicators, South Korea's economy has been dramatically slowing down as well. In the midst of this, the Bank of Korea has continued to tighten (following article is courtesy of WSJ):

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Korea Raises Reserve Ratio on Loans
By JEONGJIN LIM
November 21, 2007

SEOUL, South Korea -- South Korea raised the reserve-requirement ratio for loans to small and midsize enterprises up to half a point, spurring a selloff in banks amid expectations the change will weigh on earnings.

The higher ratios, which apply to the current fourth quarter, are expected to force banks to shift 1.4 trillion won ($1.5 billion) from net profit to loan-loss provisioning, according to the Financial Supervisory Service, Korea's financial regulatory agency.

"As banks' lending to [small and midsize enterprises] has substantially increased since 2006, we need to pre-emptively take action on potential credit risks in case the global financial environment deteriorates," the agency said.

The reserve ratio for loans to small and midsize enterprises in the construction and real-estate, wholesale and retail, and lodging and restaurant sectors was raised a half point to 1.2% from 0.7%.

The increase is larger than expected. Credit Suisse analyst Sun Mok Ha had predicted a maximum 0.3-point increase for construction and real estate. The minimum reserve ratio for loans to manufacturing and other SMEs was raised 0.15 point to 0.85% from 0.7%.

Analysts estimate the additional provisioning will lower banks' combined net profit 5% from initial projections this year.

"The news is negative for dividend prospects, as well as the profitability of the corporate-loan book, with provision requirements now extending well beyond actual realized losses," said Philippa Rogers, an analyst at Goldman Sachs.

The news, together with weakness in global financial shares, accelerated foreign selling in Korean banking shares.

Kookmin Bank, South Korea's top lender by assets, slid 4.6% to 65,100 won, its lowest since Nov. 23, 2005, when it closed at 64,900 won. The Kospi ended down 1.1%.

Industrial Bank of Korea, a state-run bank specializing in SME loans, and regional banks Daegu Bank and Pusan Bank are likely to be more affected by the change because of their larger exposure to SMEs, analysts said.

Daegu Bank fell 4% to 14,300 won, and Pusan Bank fell 4.2% to 14,850 won. Industrial Bank of Korea fell 2.5% to 15,450 won.

The move is likely to cool the strong SME-loan growth and could slow overall loan growth, given the lack of recovery in housing.

[rffrydr]

The best this has to say is that there is one spike behind us:

http://www.google.com/trends?q=foreclosure

Top four geographical zones in FL.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

ARM reset? Not in California (Redwood Trust a buy?):


http://www.msnbc.msn.com/id/21964048/
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Various predictions on home price declines in Southern California by noted economists, courtesy of the LA Times:

http://www.latimes.com/business/la-fi-howlowbox27nov27,1,5234984.story?coll=la-headlines-business

[HenryTo]

Motley Fool on the Lennar-Morgan Stanley joint venture that was just announced on Monday (the venture which involves Lennar taking a 60% write-down):

Lennar's Sensible Fire Sale

http://www.fool.com/investing/general/2007/12/04/lennars-sensible-fire-sale.aspx

[rffrydr]

FNE sees 12% max downside:
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Global property indicies:

http://economist.com/daily/chartgallery/displaystory.cfm?story_id=10241827
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

More whining from the "free market":

[rffrydr]

Our good friend the Realtors are calling a (data) bottom...again:


http://www.marketwatch.com/news/story/pending-home-sales-index-rises/story.aspx?guid=%7BF169379B-F26A-45FA-BC8D-EE2125E78898%7D
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Today is the Tomorrow you worried about Yesterday!

[dknoester]

"The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process."

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/12/09/IN5BTNJ2V.DTL

DK

[HenryTo]

Fannie and Freddie adding fuel to the fire, as they quietly add a new 0.25% upfront fee on all new mortgages that it buys or guarantees:

http://online.wsj.com/article/SB119733436109620199.html?mod=yahoo_hs&ru=yahoo