The S&A Digest: Will the U.S. Continue to Follow the "Anglophone" Housing Market?

Ian doubles down on housing stocks… Icahn bids for Lear… The housing glut, quantified… Send your accountant to Amsterdam… Our favorite Chinese translations go missing…

We wrote it. Did you buy it?

"One other way to play the coming GM bankruptcy is Lear Corp (LEA). Lear, like Magna, is a diversified auto-parts maker. It was spiraling towards bankruptcy itself in 2005, because of a very unprofitable interiors unit. Lear spun this unit off, selling it to Wilbur Ross' new car-parts venture (International Auto Components) in exchange for a 34% stake in the new business. Thus, buying shares of Lear will get you exposure to the Ross car parts company." – S&A Digest, January 18, 2007, "How to Profit from the Bankruptcy of GM."

Today, Carl Icahn offered to buy Lear for $36 per share. The stock is up 12% today and 16.5% since we recommended it in The Digest.

Longtime readers will recall my earlier recommendation of Lear (in the Rebound Report) at around $24 in the fall of 2005. I was a bit too early – about three months – into this turnaround situation.

Late last year, Carl Icahn took a $200 million position in Lear (a 16% stake). And now Icahn wants the rest of the company. Small wonder: Lear is now profitable – a rarity in the car business.

Despite its turnaround and its big stake in Ross' venture, Lear trades at a very low price (about six times earnings before taxes, interest, and depreciation). Icahn is buying a cheap stock and getting a foot in the door with Wilbur Ross. Icahn and Ross know Lear and the other top suppliers to the world's carmakers (like Magna International) will play crucial roles in the industry's restructuring. They will end up owning the automobile manufacturing industry.

I bet Icahn won't get Lear for $36 per share. If it's sold, it'll go for $40 or more.

In the final three months of 2006, there were 2.1 million vacant houses for sale, or 2.7% of the market. This is the highest level since the Census Bureau began tracking the homeowner vacancy rate four decades ago; it has never been more than 2%. Economists suspect that many of the vacant homes belong to speculators, who will soon drop prices. (See Ian's contrarian take on this situation, below.)

The Caymans are out; Amsterdam is in… While the Caribbeans have been preoccupied with protecting trading profits, the Dutch have been creatively finding ways around royalty payments. Traditional offshore accounts are losing favor due to the massive influx of hedge-fund and private-equity money, and many celebrities are putting their money into the Netherlands. The Rolling Stones and U2, along with big-name corporations, including Coca-Cola and Gucci, have set up accounts with Dutch accountants, earning favorable tax treatment for their trouble. The Rolling Stones, for example, have paid only $7.2 million in taxes on earnings of $450 million, a 1.5% tax rate, as compared to Britain's 40% tax rate.

Signs of a market top… Hedge fund Fortress Investment Group, which is set to IPO this week, will be the first U.S.-listed IPO of an alternative investment manager.

This year, the average cost of a 30-second Super Bowl ad was $2.6 million. In order to promote its Bud Light and Budweiser brands, PSIA pick Anheuser-Busch (BUD) paid for 10 of the 60 spots that CBS ran.

Many foreigners in China are upset about the disappearance of humorous English translations occasionally found on Chinese signs. The mistranslations range from "Deformed Man" posted outside a handicapped bathroom to "Show Mercy to the Slender Grass" outside of park lawns. Teams of linguistic monitors are scouring the city looking for malapropisms, correcting them in anticipation of the 2008 Olympics in Beijing. The revamp will be quite costly… many of the signs are decades old and are carved in marble.

New highs: American Capital (ACAS), AutoZone (AZO), Gabelli Dividend & Income Trust (GDV), Sangamo (SGMO), Ares Capital (ARCC), and Macquarie Global (MGU).

Monday's mailbag… it's full, usually invective-ridden, and always a joy to read. Not everyone gets to spend their Sunday evenings reading hundreds of e-mails… Send yours here: feedback@stansberryresearch.com. We can't reply individually, but we read them all.

"Question: I know you advocate using trailing stops in general, but should an exception be made for long-term value plays, like Extreme Value picks, and your 'Forever' stocks? Or should we 'buy and forget' these? Also, in light of recent skittishness about a top, would you tighten up your stops? If so, to where?" – Paid-up subscriber Sean Owen

Porter Comment: Good question. The approach to risk management varies in our different letters and sometimes in our different portfolios. Look at the bottom of each portfolio page to see what we're using. Read our recommendations to learn why.

"The oil companies should undertake a move from the Atlas Shrugged playbook: blow up all their property. That's right… all of it. Sure, they'll lose out on the reduced profits that Chavez would throw at them, but oh what a statement they would make! Plus, Chavez would be completely screwed. I suppose one can always dream…" – Paid-up subscriber CH

Porter Comment: I'd love to light the fuse in Venezuela. And I've always wanted to see what would happen if America decided to boycott all foreign oil. I'm sure we wouldn't end up in tents, wandering the desert looking for camels…

"As a new subscriber I am enjoying the daily S&A Digest. However, would someone please explain the 3 charts that appear daily at the bottom? What are they? And what do they mean?" – Paid-up subscriber Roger Gibson

Porter Comment: Well… The Hall of Fame is a list of our best historic recommendations. Like inductees to the Pro Football Hall of Fame, these stocks are "retired." We're not currently covering them. The Top 10 list features the best (highest-returning) stocks that we currently have under coverage. And the list of editors' names represents how many of our top 10 stocks they're responsible for bringing to our readers' attention.

"Last evening, I responded to one of your advertisements for your Investment Advisory newsletter – it indicated that a one-year subscription would be $49.50. I went to subscribe (and did) but the price was indicated as $99 [not] $49.50! I will watch my credit card bill closely to see that my charge is $49.50… you really should be consistent with your advertised prices." – Paid-up subscriber "Concerned"

Porter Comment: Like many businesses, we offer an introductory rate to encourage new subscribers to try our letter. If you were charged incorrectly, please let us know at customerservice@stansberryresearch.com or 1-888-261-2693, and we will refund the difference.

"I appreciate your strategic overview observations very much more than your hot tips… those who already have 'enough' wealth (my words) have the huge advantage of being able to be patient. We can afford to sit on the sidelines and wait for those special opportunities, which I know your team will draw to our attention as they come along… I particularly appreciate the Extreme Value letter – please don't ditch it – and the Model 16 portfolio in your quarterly review letter for Alliance members. They help me sort the really good long-term 'investments' from the 'necessary' monthly beat-ups your editors are forced by public demand to keep coming up with. For my part, I would be quite happy to receive more letters saying what you recently said in your PSIA letter – 'nothing much really worth investing in at this time' (my paraphrase)."

– Alliance member Ray Bricknell

Regards,

Porter Stansberry

Baltimore, Maryland

Will the U.S. Continue to Follow the "Anglophone" Housing Market?

By Ian Davis

In 2003, home prices in Australia and the U.K. were going up 20% or more a year. America's housing markets followed the trend, lagging by about two years.

In 2005, property "crashed" in the U.K. and Australia. I write crash in quotes because GDP growth continued in both countries and average home prices didn't actually decline – they simply stopped going up. By 2006 and into early 2007, growth in housing prices had resumed in the U.K. and Australia. All of the experts in those countries had predicted it would take years for the housing markets to recover.

I believe the same thing will happen in the U.S.

The situation in these countries two years ago was much like the one that exists in the U.S. today. There was a lot of media hype about the fall in real estate prices. But look at what actually happened…

Below, you'll find a chart that shows what happened in the U.K. and Australia, and how closely the U.S. market has followed these other Anglophone property markets. I've skewed the time axis for the U.S. data by two years, so that the markets all line up.

In November, the supply of homes for sale in the U.S. reached a peak, and homebuilder confidence surveys came in near an all-time low. Housing was unaffordable. These are terrible conditions for anyone trying to sell a home. Ironically, that's the best time to buy homebuilding stocks, because they trade at extremely low prices during these crisis periods.

I recommended buying Toll Brothers (TOL) back then. And, if you haven't bought shares yet, it's not too late.

There's a very good chance that our property crash, like the U.K.'s and Australia's, won't last long. These countries' housing markets were even more overheated than ours. Yet two years later, growth started to accelerate again.

It has now been about two years since growth in U.S. home prices began to weaken. It may be time for the U.S. market to turn around. GDP growth continues at a solid pace, and inflation will continue to support real estate prices. I expect prices on homes will begin to increase again, much sooner than most "experts" are predicting.

CONCLUSION:

The real estate market's slump may be nearing its end. As buyers return to the market and home prices begin rising again, homebuilding stocks will continue to perform well. Despite the quick run-up that we've had lately in Toll Brothers, I recommend that you keep your position on the table.

Good investing,

Ian Davis

February 5, 2007

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