The S&A Digest: Nearing a Bottom in Homebuilders?

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(Top 10 highest-returning open positions across all S&A portfolios)

As of 06/27/2013

The coming condo carnage... Buffett's China stock... Time to buy HD?... Insider buying at financial firms... Ian on housing stocks, part II... Mocking Jesus?

If you think things have gotten bad for homebuilders... check out the condo builders. According to The Wall Street Journal:

"In 2006, the number of new condominium units completed jumped 145% to 102,800, from 41,900 in 2003, according to the U.S. Census Bureau. Last year was the highest level since 1985, when 135,800 units were built. So far this year, 48,354 units have been built and another 72,000 are under construction, according to New York research firm Reis Inc. Downtown San Diego can expect 2,900 new units to arrive on the market in the next year, according to real-estate investment brokerage Marcus & Millichap. Hessam Nadji, a managing director at the Encino, Calif., firm, estimates it will take as long as 18 to 24 months for the most-saturated markets to buy up the glut of condo inventory – if the economy overall stays strong. Miami is in worse shape: The city added 4,549 condo units in 2006 and 3,276 so far this year. Another 7,985 will be delivered by the end of the year, with another 8,260 slated for 2008 to 2011, according to Reis, for a grand total of 24,070 new units between 2006 and 2011."

We've written – extensively – about the Miami madness (here, here, and here). Who paved the way for the Miami insanity? Folks who had more OPM (Other People's Money) than experience: Condo construction lending ballooned to $31.3 billion in 2006 from $8.4 billion in 2003.

At some point, there will be a clearance sale of those condos in Miami. I went looking for bargains last year... and the prices hadn't come down much, if at all. But... in another two or three years? At some point, there will be a fire sale with entire buildings being auctioned off. Some will be liquidated for 25 cents on the dollar. If you've got access to $50 million to $100 million... keep your powder dry.

True Wealth pick PetroChina (PTR) will build its second cross-country gas pipeline, spanning from the Xinjiang region to Guangzhou, capital of southern China's Guangdong province, and eastward to end at Shanghai. The 3,000-mile pipeline will distribute gas from Turkmenistan throughout China. PetroChina, the sole investor, expects to take 30 billion cubic meters of gas, 60% of China's annual consumption, from Turkmenistan by 2009. PetroChina will not know the costs until October, but insiders estimate a price tag of $5 billion.

Extreme Value pick Home Depot (HD) agreed to sell its supply unit to a group of private-equity investors for $8.5 billion, $1.8 billion less than planned. Even though Home Depot is accepting less for its business, the deal should not hamper the company's ability to buy back $22.5 billion in stock. Shares of the home improvement retailer were up 1.6% today.

CEOs of financial companies are going on a buying spree... of their own stock. The market downturn in financials led executives of banks, consumer lenders, and insurance companies to pile cash into their stocks. Not since 1995 have more financial executives bought more shares in their companies during August. Insider buying is thought by many to be the best bullish indicator for a stock, as well-informed purchasers show confidence in their company. Inside Strategist editor Graham Summers has had years of success tracking insider buying.

We also note that Sjuggerud's best idea in the financial sector – the Canadian "pawnbroker" to the rich and famous – saw its CEO buying a substantial amount of stock last week.

New high: Oakley (OO).

In the mailbag... we're trying to keep things short and sweet. But it's not easy... Think you can rattle our cage? Send us your best: feedback@stansberryresearch.com.

Note: We moved our customer service team last week, from the second floor to our third floor. You might have experienced unusually long wait times and a delay in getting e-mails returned. We apologize... and we should be up to full speed again in one or two more days.

"Over the last several years I've used many of your recommendations and had many great profits. I've really gotten a lot out of my subscription to your service. Thanks. One of my favorite strategies is to use my own analysis of stocks and to use volatility to my advantage. That consists of doing covered calls, especially when volatility reaches the extreme levels like we've seen lately. Right now option buyers are paying ridiculous amounts for options. Used properly it makes for some great profits with reduced risk. Even last night's comment about Moody's could provide for a 12.95% (31.7% annualized) return by January (selling Jan. 2008, 45 call) and of course, assuming Moody's is above $45 on option expiration. I did hear you say in Aspen last year 'Why would anyone want to limit their gains if they think a stock will go up?'... Your point is well taken, and I agree with it to some extent, but the last month's action in the stock market will answer that question.

"My point is, I think some of your subscribers or future subscribers would benefit and prefer to have a less volatile and more risk adverse portfolio and give up some of the gains. At times like this it may be just what your subscribers want to hear. A covered call newsletter may be in order. You may want to keep it in mind. And keep up the great work, you haven't offended me yet but keep trying! PS. Tell S. Sjuggerud thanks for the great profit in SA. 33.8% in 74 days! No covered call on this one. Job well done Steve!!!"

– Paid-up subscriber Bob Greene

Porter comment: In the Moody's article, I mentioned the possibility of writing covered calls because, as you note, the premium is attractively priced and there's little chance (in my view) the stock will rally very quickly. However, I rarely recommend writing covered calls. Why? The premiums on covered calls are rarely worth the risk of holding the stock. Nine times out of 10, you could achieve almost the same income in corporate bonds, with far less risk. I've seen people buy and hold risky equity, just so they could make a good call premium. This is delusional... and often results in catastrophic losses.

"I read the S&A Digest nightly, and while you did mention that S&A was building a new website a couple months ago, I don't think anyone has taken the time to tell us about the new features. I don't recall your earlier website having had a search box... What else is new with your website?"

– Paid-up subscriber Luis Anderson

Porter comment: The new website has a lot of new content, better archive organization, and a terrific search tool. Plus, better security. Take a few minutes and look around. Tell us what we could improve on: www.stansberryresearch.com.

"Nobody defend fiction?! After my wife read digest, I had to liquidate my fiction inventory at big lose! Now I left with mostly empty shelves and the proceed I got can't even buy half of your so called top 10. Guess IRS won't even allow me to write this off. All because of your bias opinion. Thanks a lot!" – Paid-up subscriber Sam

"It's clear that you have a point of view regarding Religion and anyone who might consider himself as having 'religion.' You're entitled to your 'belief' but it would be nice to know that you don't consider all those who believe as needing to act out violently. Your response to the religion question seems to paint with a large brush." – Paid-up subscriber Ronald Madrid

Porter comment: I've never made any statements about my own beliefs, which are personal and utterly private. But that doesn't stop people from regularly making assumptions. It's the same way with politics: Each week, I'm accused of being strongly pro-Democrat or pro-Republican. (On this topic, I'm openly agnostic. I despise both kinds of politicians with equal vehemence.)

By the way, the question I originally addressed was about which books Americans read – or don't read, to be more precise. I suggested that books other than fiction and religion (the two most common choices in America) might be more useful for self-improvement. (By the way, I've read thousands of fiction books, and I realize they're often very educational. I've also studied the Bible and read dozens of books about various religions. But I've certainly learned more practical skills from reading other kinds of books.) I thought it was fairly obvious that I wasn't addressing the importance of religion at all – I was addressing the importance of reading. Nevertheless, one subscriber wrote that because I had mocked Jesus, I was sure to die a horrible, premature, and violent death. He then listed a dozen people who allegedly mocked Jesus and went on to die painful deaths at a young age, including John Lennon. You'd have to be pretty dimwitted not to appreciate the irony of someone who claims to be a follower of Jesus Christ threatening my life and suggesting that Jesus kills people who displease Him. I've always commented on these kinds of responses because I find them irresistibly entertaining, ironic... and sad. Folks who are this touchy about God tell me more about the precarious nature of their own faith than they tell me about the nature of religion. And this dilemma of the faithful might explain why religious fanatics are so difficult to understand and so easily moved to violence.

Regards,

Porter Stansberry

Baltimore, Maryland

August 27, 2007

Nearing a Bottom in Homebuilders?

By Ian Davis

When people make the case for the poor state of the housing market, they usually point to one thing above all others... oversupply.

Between August 2003 and March 2007, the supply of single-family homes for sale in the U.S. increased 137%. At its peak, the supply of homes for sale was 8.3 months (meaning it would take 8.3 months – at the current rate of sales – to sell all of the homes currently on the market).

This oversupply took its toll on homebuilding stocks, which are down 57% in the last two years... after all, who needs new homes built when so much supply is already on the market?

Despite the bad news, the housing market may be closer to a bottom than a top. The supply of homes for sale in the U.S. is shrinking... since March, the inventory of homes has fallen from 8.3 months to 7.5 months, a decline of 9.6%.

If this number continues to fall, it may not be long before demand starts rolling in again for the homebuilders.

Housing Supply Down 9.6% from Peak Five Months Ago

Where We Are in the Current Homebuilder Recession

The largest fall in the DataStream homebuilder’s index occurred in the early 1970s. Homebuilding stocks fell by a staggering 84% starting in 1973, before finally bottoming almost two years later.

The following table shows all the large declines in the homebuilder index since 1973. As you can see, the current decline is tied for the third-largest fall overall and currently holds the record for the longest period of time without at least one strong intermediate rally.

Conclusion

Homebuilding stocks have not yet reached a bottom... however, some conditions, including the supply of homes in the market, have been improving. Still other factors continue to decline. For example, housing affordability, sentiment, and some of the homebuilder valuations are still suffering.

I'm keeping a close eye on homebuilding stocks, waiting for the conditions to be just right. I thought we had reached that point last year when I recommended homebuilders. However, the subprime-mortgage crisis caught us off guard, and the sector resumed its free-fall.

The correction in homebuilders is now approaching record levels... a healthy rally may not be too far in the future.

Good investing,

Ian Davis

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