Lennar’s Windfall

So far this year 15 banks have been closed by the FDIC. Last year, it was 134, if I’m counting the closing figures right as posted on the FDIC website. Some of you may remember the last time there were mass amounts of bank closings during the S&L crisis of the late ’80s and early ’90s. At the time, a special agency, the Resolution Trust Corporation (RTC) was set up to dispose of the assets of these banks.

The RTC was controversial because many times it sold assets at prices far below market value. Ultimately though, the RTC succeeded in getting assets seized from insolvent banks into stronger hands. And because some of these "stronger hands" had low cost structures due to low up front costs, a new phase of growth was born.

A similar thing is happening now. Lennar Corporation (NYSE: LEN), a homebuilder, recently picked up $3 billion worth of unfinished homes from the FDIC for about 40 cents on the dollar. Lennar only had to put up $243 million. The FDIC kicked in $365 million and provided 0% interest financing.

Because Lennar’s upfront costs are so low, it will be able to hire the workers needed to finish the homes and offer those homes for sale at a price that makes sense for buyers. This is how growth returns after a bubble.

But this time there’s a twist. The $365 million put up by the FDIC? It’s an equity stake. Yes, rather than simply disposing of the assets to the highest bidder the FDIC, and by extension the government, now has a stake in those unfinished homes.

The FDIC could turn a profit here. But by offering financing and providing an interest-free loan, the FDIC is also supporting home valuations by not letting these unfinished homes sell at absolute rock bottom prices.

Pawns in a Rich Man’s Game

Bespoke Investment Group is reporting that 10% of U.S. corporations are raising earnings expectations, compared to 4.1% that are lowering them. That’s the largest gap on record, and suggests that analysts still have earnings projections that are too low.

It’s hard to blame the analysts for being cautious. While the economy has improved, uncertainty about unemployment is an issue. It’s easy to imagine that consumer demand could drop. Still, let’s not ignore what corporations are saying. After all, they are the ones in direct communication with their customers. I can’t help but be a little optimistic that there is more upside for the stock market.

Don’t ignore the consolidation news from the commercial real estate sector this morning. Mall owner Simon Properties (NYSE: SPG) is offering $10 billion for its rival, General Growth Properties (NYSE: GGP).

Several investors and economists believe commercial real estate will be the next shoe to drop. And within that sector, shopping malls are probably the most beaten down group. That Simon Properties is considering a buyout means that it sees opportunity. And it is moves like these that often mark a bottom for an industry or sector.

I’ve recommended a commercial real estate stock that may have some terrific upside. Maguire Properties (NYSE: MPG) is back to its support level at $1.50. If you didn’t catch it there last time, you might want to give it a look.

Recession for Europe?

It’s no surprise to me Europe is experiencing weaker than expected growth. In fact, in Wyatt Investment Research 2010 Economic Predictions and Investment Outlook, I wrote that it was likely that Europe enters recession again. And when we read that Euro-zone GDP growth for the 4th quarter actually declined 2.1%, and sequential growth was just 0.1%, it appears that recession is more than just a possibility for Europe.

The contrast between the 4th quarter in the U.S. and Europe is about as stark as it gets. And it’s clear to me that the main difference is government stimulus. For instance, French car-maker Renault expects car sales in Europe to fall 10%. Car sales in the U.S. have been pretty good, and the cash for clunkers program helped. There should also be no doubt that government support for the housing market has helped.

There is also an interesting parallel between countries like Greece or Ireland and states like California and Nevada. No doubt, if California was a country and not a state, it would be on the list of countries with sovereign debt problems.

Fortunately, California’s problems are somewhat masked by the overall relative strength of the U.S. economy, but that won’t last. Debt issues in certain states have the potential to become a real drag on growth.

Dumb Luck?

My Washington DC office has been vacant all week. It’s amazing to me that record snowfalls have turned my DC staff into shut-ins (and closed the government for the third day) while life goes on at its normal pace here in Vermont.

The snowstorm that’s crippled the mid-Atlantic region will certainly have an impact on 1st quarter GDP. I would expect that 1st quarter retail numbers will be pretty bad. But there could be some good numbers for restaurants coming. The rally in the dollar over the last few weeks has lowered food costs. And I also think that once we see a thaw on the Eastern seaboard, people will shake off their cabin fever with a night out. I know I would…

I’m really on the fence with this one: did the Obama administration purposefully wait to attack the unemployment situation? Or is it just dumb luck?

I ask because it’s clear to me that now is the time to strike. If stimulus money had been used at this time last year to help the unemployment situation it wouldn’t have worked. Corporations were still in the process of cutting costs to meet lower demand. And at the time, demand itself was a moving target.

Now that the economy has stabilized, demand is returning and corporate earnings are on the upswing. So corporations are starting to hire again. New jobless claims are down again, as are continuing claims. The unemployment rate has dropped, and on-line employment ads are increasing.

The Conference Board, a non-profit global business organization, reported that online job demand is rapidly rising. According to the Conference Board, the total job vacancies advertised online today is over four million, or the same level as November 2008.

Seems to me, the added perk of government incentives, like a payroll tax holiday or tax credits for new hires, could give companies the final push needed to add employees.

Is China Caving?

The Dow Industrials cruised past 10,000 yesterday. Clearly, the news that Germany may be coming to Greece’s aid was a big relief for investors. The euro rallied against the U.S. dollar as well, an important catalyst for stock and commodity prices on U.S. exchanges.

Some stability in Europe and progress on a jobs bill in Congress will be good for stocks. Earnings are already solid and I suspect there is more upside coming.

I got on the phone with TradeMaster‘s Jason Cimpl to see if yesterday was the type of bullish activity he wanted to see from the market. He noted that although the market got a nice bounce (TradeMaster Daily Stock Alerts members closed short positions worth 15% and 5%), the close was very weak.

Typically, indices in a bull trend would have made a push higher into the close. Despite the weak close and his growing pessimism, he did note that market internals were "spectacular." The advancing volume data showed us that the upward action was more than just shorts covering their downside positions – it was also bottom feeders nibbling at the low stock prices. He’s watching the 1085 level on the S&P 500 as an important resistance point this week.

There’s also some significant news from China today. Credit Suisse is suggesting that instead of letting the yuan appreciate, it may raise wages for Chinese workers. That’s important on a number of levels.

First, higher wages for Chinese workers removes some of the competitive edge that China enjoys because it makes their goods more expensive. This move would also put more money in the average Chinese citizen’s pocket, which serves China’s bigger goal of supporting domestic demand for Chinese goods.

Being an export economy is an unsustainable model, and China knows this. It must transition to a more balanced economy. I’ve noted in the past that China needs some form of social security to unlock the massive amount of saving in that country. Higher wages is a step in that direction.

Obviously, if wages in China are higher, it will help the U.S. manufacturing sector as well. This is one of the pleasant outcomes of globalization. Ultimately, we will see a more level playing field as the standard of living in emerging economies rises.

The final takeaway of this move is political. It’s no secret that President Obama has been putting some pressure on China to remove unfair trade advantages. I won’t call it "caving in", but the fact that China would take steps to remove some of the advantage that its exports enjoy clearly shows the country is sensitive to the demands of its trading partners. Who knows, maybe China will also find a solution that lets Google stay in the country?

TradeMaster Jason Cimpl does it again

I expect the recent volatility is on readers’ minds, so let’s get right to TradeMaster‘s Jason Cimpl and his outlook:

The bulls did not capitalize on Friday’s bullish close yesterday. Stocks were up strongly in the morning with most indices up more than half a percent. Those gains held into the afternoon and it seemed as though we were going to see a nice pop into the close. Then around three, the market started to turn red and indices sold off hard in the last hour of the day. But it is not over for the bulls.

Despite the weak afternoon, the SPX managed to close above 1065 support. Resistance was formidable at 1071, which is the price we will be watching for a break out today in a short squeeze.

Short interest picked up substantially. We closed down most of our shorts already (including one with a sweet 15% profit . Basically, the market is oversold and any pop up will be fast. We held onto most of our longs anticipating a move higher, possibly back up to 1120, but we will be selling into any rally.

It’s important to remember that the vast majority of stock trading volume comes from institutional investors like mutual funds, hedge funds, and even sovereign investment funds.

As Jason notes, stocks rolled over yesterday afternoon. That’s consistent with institutional trading, which tends to take place during the first and last hour of the trading day.

It’s also important to remember that institutional selling isn’t necessarily an indication of economic or earnings data. Part of the reason stock prices hit such lows last March was that banks and other investors had to raise cash at all costs. And that can mean selling assets, regardless of one’s outlook.

A similar situation may be happening right now. Greece (especially) and other European countries have debt problems. No doubt some of the selling activity we’ve seen lately is related to this. Investors are hopeful that a solution for Greece’s debt problems is on the horizon. That’s helping today’s upside bias. That hope is also boosting the euro against the U.S. dollar which is good for stocks and commodities.

Also, don’t dismiss the government’s new-found focus on employment. We’ve already started to see what may be a trend change for employment. Jobs are the missing link to the economic recovery. Good news on this front will certainly help stocks move higher.

Rooting for the Underdog

What a great Super Bowl game! I have to admit, I was pulling for the
Saints, but mainly because of what the Saints mean for that city. I’m
sure we all remember the horrible aftermath of hurricane Katrina. The
very existence of New Orleans was in question. The Saints considered
moving, and I recall suggestions that only the French Quarter be saved
and made into a corporate convention amusement park.

Of
course, that would have been an absurd commercialization of a proud and
rich heritage. That New Orleans has come back to resemble the city it
was before Katrina is nothing short of miraculous, and now the people
of New Orleans have a Super Bowl trophy to crown their achievement.
Congratulations, New Orleans and the Saints.

It’s
tempting to extend the metaphor of New Orleans to the United States as
we rebuild after the financial crisis. Of course, I have no doubt that
we will recover. But there will likely be no single event that crowns
the recovery like the Lombardi Trophy does for New Orleans.

And
besides, we’re investors. It is our desire to be properly positioned
for a growth in stock valuations, all the while avoiding the pitfalls
of overvalued stocks and worsening economic conditions.

Clearly,
investors have been pondering the potential of weaker economy as some
stimulus policies end, Europe faces debt problems and China moves to
slow its economy. Bloomberg reports that investors pulled $9 billion
out of global equity funds during the last week of January. And
investors have bet heavily on an extended sell-off as evidenced by huge
volumes of put option activity.

At the same time, 73% of
S&P 500 companies have beaten 4th quarter earnings expectations.
That’s the best performance since 1993. Strong earnings, coupled with
the recent 7.3% decline, have left the P/E for the S&P 500 at 18,
down from 24. The forward P/E, based on future earnings expectations,
is below 13.

Unemployent falls and so do stocks

Yesterday’s decline reversed the rally we enjoyed to start the week. The S&P 500 is now below support at 1071. Is that a death knell? No. But it’s not good, either.

Mounting debt problems in Greece, Spain and Portugal are spooking investors. Oil prices are lower as investors worry the global recovery isn’t gaining momentum.

The Labor Department reported that companies cut 20,000 in January. New unemployment claims also rose. But somehow, the unemployment rate fell to 9.7%. I’m not going to call that a “damn lie”, but statistics don’t always tell the whole truth.

We’ve noted frequently in Daily Profit that we can expect to see some pretty wild swings in the data as the housing market and unemployment rate bottom. One month’s positive data gets revised lower, and then the next month’s negative data gets revised higher.

There’s no doubt the economy is improving, but is it happening fast enough? And perhaps more importantly, where will the base-line be?

An unemployment rate around 4%-5% used to be the norm. We’re certainly looking at a higher base for unemployment over the next few years. GDP growth will be lower. Investors will probably support lower P/E ratios and levels for the major indices.

That’s not a disaster, but it does mean you’ll need to be focused on value and not afraid to take profits when you have them.

The Case for Coal

It’s quite a conundrum. America spent around $475 billion for foreign oil in 2008 (2009 numbers are not complete yet, although the total is certainly projected to be lower). It’s clear that electric powered battery technology for cars would allow us to keep more U.S. dollars at home, improve the trade deficit and provide manufacturing and other jobs, too.

We have enough sunlight, wind, natural gas, and coal to generate the power it would take to transition to domestically supported power generation. The long-term benefits are obvious. Wind and solar installations have an upfront cost, but pay for themselves over time. Natural gas and even coal are domestic resources that can and should be leveraged to allow us to be more energy independent.

But getting to the point of energy independence is a difficult path.

It’s easy to look at that $475 billion figure and say if we invested that into the power generation economy, we’d have efficient battery technology for electric cars and plenty of new manufacturing jobs.

However,…

The Forecast for 2010: Looks Like Volatility

Wow. Two strong rallies to kick off
February. It’s great to see some buying interest after January’s
sell-off. But I would caution that 2010 will be more volatile than the
final 9 months of 2009, when stocks were on a one-way trip higher.

You
could argue that stocks are overvalued based on index P/E levels. The
trailing P/E for the S&P 500 is 21. At the same time, companies are
once again beating earnings estimates. Business is better than analysts
expected.

The forward P/E for the S&P 500 is 14. That’s based
on analysts’ expectations of 2010 earnings. If analysts are once again
low-balling the numbers, then the S&P 500 may actually be cheap.
But if unemployment continues to weaken, or if banks don’t loosen up
lending, or if the housing market doesn’t improve, then perhaps stocks
are expensive.

And so, stock prices will very likely be more
volatile this year. That means it’s going to be even more important to
do good research and buy quality stocks at reasonable valuations. It’s
also going to be critical for investors to focus on the sectors that
will outperform this year. Of course, all of this will be part of our
ongoing conversation here in Daily Profit.