The National Association of Realtors (NAR) reports existing home sales plunged 16.7% in December. Nearly one-third of all existing home sales were distressed sales. Chief NAR economist Lawrence Yun says the housing market is going through swings caused by the $8,000 first-time homebuyer tax credit.
The tax credit expires on April 30. What happens then? Who knows? When governments start interfering in markets, it becomes much harder for businessmen and entrepreneurs to operate and make plans.
Another source of free help for homebuyers is starting to look more and more suspicious all the time... We've noted before how Federal Housing Administration (FHA) loans were something of a new bubble unto themselves, recently comprising nearly one-third of all new home loan originations, a tenfold increase over previous historic levels.
Hyper growth in FHA loans tells me lots of fraud must have taken place. Fraud is now coming to light... The FHA has stopped three lenders from originating FHA loans and suspended a fourth. One former FHA lender, Strategic Mortgage Corp of Oklahoma City, had a 14.7% early default rate. National Mortgage News, a mortgage-lending trade publication, reports Strategic "charged borrowers impermissible or excessive fees and submitted a false certification to HUD."
The Financial Crimes Enforcement Network, a division of the Treasury Department, says mortgage-related crimes "remain at a historically high level" after six straight years of double-digit growth.
Technology darling Apple just announced a 50% earnings increase to $3.38 billion for the fiscal first quarter – the single most profitable quarter in its history. Revenue increased to $15.68 billion from $11.88 billion. In the quarter, Apple sold 8.7 million iPhones, up from 4.4 million a year ago (but still below analysts' expectations of 9 million). The image below shows the explosive growth in iPhone sales:
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Apple also sold 3.4 million Macs, 33% more than a year ago. The company saw a decline in iPod sales... "only" 21 million units sold in the quarter, down 8% from a year ago. And tomorrow, Apple will unveil "a major new product that we are really excited about," said CEO Steve Jobs. Most people expect the new product to be a touch-screen tablet that will offer limited computing capabilities and allow users to read books and periodicals – essentially an enlarged iPhone.
Apple is trading near all-time highs – $215 a share, which it hit January 5. Much of the good news surrounding the "mystery product" is already priced into the stock. Apple shares trade today at about 18 times all-time peak free cash flow. So while Apple may continue producing steady earnings, it will be difficult to make any blockbuster gains buying the stock (the company's market cap is nearing $200 billion).
But if you can find a small company that sells component parts to Apple, the tech giant's growth could mean a double or triple in a smaller firm's bottom line. Investing in that smaller stock can make you two to three times your original investment. Penny Stock Specialist editor Frank Curzio calls this investment strategy "hitching a ride." It's one of the many ways he finds huge winners in the "under $10" universe.
Using his hitch-a-ride strategy, Frank recently discovered a small technology firm that just started producing an integral component in Apple's iPhone. The stock currently trades around $6 per share. But as Apple continues growing, this small technology company's stock will explode. Frank expects early investors to make 220% in the next 12 months. To read the full story and learn why Frank is one of the only analysts in the country who knows this firm even exists, click here...
When most people visit China for the first time, they're amazed by the quickly developing economy and the construction boom. But when Inside Strategist editor Braden Copeland first visited China in 2006 for a business venture, he was taken aback by something else... Braden was amazed by the huge number of Chinese people he saw gambling. Braden saw people gambling on street corners and factory workers betting on billiards during their break. He knew there was an investment opportunity to be had, and he wrote about it in this essay for Growth Stock Wire.
With the growth of Macau (China's Las Vegas) and a recent law allowing a Chinese lottery, it seems China's thirst for gambling is only growing. Early investors in Macau gaming made thousands of percent gains (Macau is now the most profitable gaming destination in the world – even over Las Vegas). And a company that recently released online lottery games in China soared 1,350% in just six months.
Braden has discovered another company poised to skyrocket from China's gambling habit. This company is the best way to take advantage of the new law that legalizes the lottery in China. To learn more about Inside Strategist, click here...
One of the reasons airline stocks are so risky is an airline seat is a fungible commodity. One airline seat is virtually identical to another. Commodity producers generally lack pricing power – the ability to raise prices without losing customers. We all know commodities go up in price sometimes. During 2008, airlines raised prices 15 times. In 2009, they raised them four times. The airlines' latest attempt at raising prices went through last week, boosting fares $6 to $16 a seat.
Now, the airlines are taking back price hikes. Delta, United, and Continental all said they rescinded fare hikes "to remain competitive."
A couple years ago, Jim Rogers said he was buying airlines because they'd been cutting flights and he noticed every flight he took was full. It worked because it was a contrarian play, which is the only way I know to make money in commodity stocks. The opportunity in airlines is done. But it's looking more and more like a contrarian buying opportunity is coming in the hotel industry, perhaps in the next year or so...
While the airlines were raising rates last year, hotels were cutting them aggressively. Revenue per available room, or RevPAR, a key industry metric, fell 16.7% in 2009, more than ever before.
Some hotel rooms are commodity-like, but many are not. If you have the only motel at a crossroads in the middle of almost nowhere, folks on long drives who need a place to sleep for the night have little choice but to check in at your place. If everybody thinks you've got the best hotel rooms in a particular area, again, you'll have a competitive advantage.
And if I go to New York, I may have to settle for a less expensive hotel, but I'd always like to stay at The Plaza because it has the best showers and mattresses of any hotel I've ever stayed in.
But hotels, too, will likely see lower rates in 2010, according to industry datakeeper Smith Travel Research.
Hotels saw big declines in group bookings. Business groups tend to book large blocks of rooms, sometimes years in advance. The drop in group reservations makes it harder to know if they're going to make any money or not. Ed Walter, CEO of Host Hotels & Resorts, says, "Our portfolios saw unprecedented group declines. That's one thing that we used to prop up our performance."
When the one thing that props up your performance goes away, look out below. Host Hotels, like most hotel stocks, has soared off its March 2009 bottom, up more than 250%. It sells for more than 35 times trailing free cash flow. That has to be an even higher multiple of 2010 free cash flow, given the main support under its revenues continues to weaken.
When business groups stop booking rooms, the industry stops building new hotels. The U.S. lodging industry built a record 154,667 new rooms in 2008 and nearly as many (146,929) in 2009, flooding the market with rooms it doesn't need. Industry analysts at Lodging Econometrics estimate about 82,000 new rooms will be built this year and less than 64,000 next year.
The setup is looking good. Hotel pricing continues to decline. The supply of new hotels is falling dramatically and expected to do so for another year or two. If this keeps up, we would expect the sentiment to show up in hotel stocks at some point, pushing prices down to depressed levels.
For now, the opportunity in hotel stocks appears to be a better short than long... The Dow Jones U.S. Hotel & Lodging Industry Index is more than 220% off its March 2009 bottom.
If the hotel stocks get cheap enough, it could set you up for years of compounding in some of the better hotel stocks. My all-time favorite lodging industry stock, one I've coveted for years, is Choice Hotels. Choice Hotels is essentially a royalty on several well-known hotel/motel franchises, including Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, and Econo Lodge.
Choice doesn't own hotels. It franchises them. Without having the enormous operating and capital expense involved in owning hotels, Choice's business requires little capital to sustain and grow.
Today, Choice gets a piece of the action from more than 450,000 hotel rooms worldwide, with more than 90% of revenue from U.S. properties. The company is one of the all-time world champion share repurchasers, too. It has reduced its share count from 84 million in 2001 to less than 60 million shares outstanding today. It continues to buy back shares with much of its ample free cash flow.
Free cash flow peaked in 2006 at more than $146 million. Over the last 12 months, it has fallen to $80 million. Right now, the stock sells for about 27 times trailing free cash flow and about 15 times peak free cash flow. That's not quite cheap enough. I'd like to see it get closer to 10 times peak and much less than 20 times trailing. I have a feeling we might just see that happen if the hotel industry has another bad year in 2010.
New highs: Burlington Northern Santa Fe (BNI), Kinder Morgan Energy Partners (KMP), Icahn Enterprises (IEP).
More subscribers weigh in on how to smoke out fake gold coins. Send your ideas to feedback@stansberryresearch.com.
"If I have missed your publication talking about this topic I apologize. Detecting fake gold is very easy provided you have the Fisch fake gold coin detector wallets. They may be used for the Maple Leaf series (1/10, ¼, ½ and 1 ounce) as well as all commonly bought/sold coins, even the 1 ounce Credit Suisse bar. I bought my wallets years ago and have used them extensively.
"The principle is simple. To be genuine, a coin must be the correct diameter, thickness, and weight. The Fisch wallets test the thickness and diameter, plus the coin must also cause the tester to tip. Simply said, a fake coin can be made to look like gold and be of proper size, but the weight will be wrong. If the coin is made for the weight to be right, the diameter is wrong. It is true that a skillful forger might make a coin of mixed metals that could pass the test, but making such a coin would cost more than making it with gold in the first place.
"Wallet No. 1 tests the Mex 50 peso, 20 Peso, Maple Leaf, 100 Corona, and Credit Suisse bar. Wallet No. 2 works for the Kruggerand, ½, ¼, 1/10, and 2 Rand. Wallet No. 4 is the Maple Leaf series, but I don't remember what Wallet No. 3 is for since I don't buy whatever it tests. The Wallets are not cheap, but just one fake Kruggerand in your collection would pay for all of them – at least it would have at the time I bought mine.
"I hope this helps. I'm sure Google can find a source for the Wallets." – Paid-up subscriber Robert Pickens
"Problem of tungsten bars encased in gold. Solution: a handheld ultrasound machine. The gold tungsten interface will reflect the sound waves and the thickness of the gold wrap is easily measured. Secondhand devices are available from used medical equipment suppliers. Prices about $1,500-$4,000." – Paid-up subscriber E. Albin
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
January 26, 2010