The Fundamental Analyst: Sub prime / US housing / US Earnings

Wednesday 28 March 2007

Sub prime / US housing / US Earnings

Just when you thought it was safe to venture out into the markets again volatility rears its ugly head. For those with a memory past yesterday this will come as no surprise yet the market continues to act as though everyday is a new beginning devoid of memory. The sub prime debacle is proving to be a real nuisance, the latest casualty being homebuilder Lennar Corp who reported a 73% fall in first quarter earnings from a year earlier. So much for the sub prime problem being contained to a narrow sector. Lennar Corp's CEO commented that:

"The typically stronger spring selling season has not yet materialized. These soft market conditions have been exacerbated by the well-publicized problems in the subprime lending market,"

All important US housing data released on Monday saw new home sales fall 4% to an annual rate of 848,000 against an expected rise to 985,000. Even more alarming was the stock of unsold homes rising to 8.1 months, its highest level since January 1991.

Turning to earnings Zacks tells us that US 4Q06 earnings growth came in at an impressive 13% about 3% above expectations. Expectations for 1Q07 are currently at about 8% however if the last 2 quarters are any indication that could easily be bumped up to 11%. More interesting is Zacks revisions ratio which has fallen to 0.80 for FY07 earnings indicating analysts are cutting their earnings estimates. How many more quarters of double digit earnings does the market have left in this cycle? Consensus seems to be not many or none.

So we have sub prime problems that just won't go away, a slump in housing that continues to get worse and slowing corporate earnings. Add to that the latest figures showing consumer confidence on the wane and the case for a deteriorating economic outlook continues to get stronger. However in a market with the attention span of a hyperactive child the focus turns to dissecting Bernanke's testimony to determine the likely direction of interest rates. The market's view seems to be that the slightest hint of a rate cut will keep the good times rolling. Another view might be that the need for rate cuts is just more evidence of a stumbling economy.

1 Comment:

Anonymous said...: Scott,

Agreed, this will get far worse before it get's better.

Check this out;

"With no one quoted, and no speech is cited, one has to assume this is straight from the horse's mouth. The WSJ doesn't print factual statements about the Fed on the front page without knowing this is precisely what they are thinking. That's simply not how they roll.

So we can assume that Mr. Ip. is repeating what he was told by very senior Fed Sources. Consider the specifics of the following:

"The Fed is seeing increased risks to its forecast that the nation's economy will grow moderately this year. Those risks include the surprisingly weak level of business investment and the hard-to-predict outcome of the current troubles at the riskier end of the mortgage market.

The Fed changed its statement last week to get the flexibility to cut interest rates in coming months if those risks grow. But it is unlikely to use that flexibility anytime soon, because the risks aren't big enough and inflation remains uncomfortably high. (emphasis added)

I'll bet you that the last underlined sentence came verbatim from the Fed. If it was not emailed, than it was spoken slowly and repeated. And the surprisingly weak CapEx chart? Yeah, you can assume that has the Fed nervous.

Here's another classic insider line (and the word "Housekeeping" is classic bureaucracy speak):

"Housekeeping" played a part, as well. For several months, some officials saw the Fed's previous policy statement, which had indicated rates could rise but not fall, as increasingly inconsistent with their own expectations of unchanged rates for the foreseeable future.

We are only to the middle of the article, and we get the conclusion:

The new statement reflects a Fed on hold. It contains no explicit reference to the direction of rates, saying only that "future policy adjustments will depend" on growth and inflation, but reiterates enough inflation concern to indicate lower rates aren't on the table.

The rest of the piece is worth a read, but after this point its just a standard article. All of the prior paragraphs can be considered dictation from the Sermon on the Mount."

The bull died.
It just isn't that obvious yet.

jog on
grant; 30 March 2007 at 8:16 am