Tuesday, January 29, 2008

Credit Default Swaps Paint Ugly Picture for Homebuilders. Stock Prices of Late? Unicorns and Butterflies!

You can't tell from the large spike in stock prices, but odds are increasing that we are going to get a bankruptcy in the housing sector. Or multiple ones. [Jan 11th - Standard Pacific (SPF) - the First Major Homebuilder to Go?] But maybe not in this era of government intervention and moral hazard. Perhaps a shotgun wedding will be arranged or a private equity or foreign buyer will be "gently persuaded" on the merits of buying a homebuilder. After all the US real estate market will come back. Heck, by spring 08 at this rate right? We can get those Fed cuts down to low to mid 2%s. We can increase mortgages covered by Fannie and Freddie to some ungoldy number like say $700K+ (oh wait, that's already taken care of) etc.

Well the bond market seems to say differently. I keep pointing this out because all fall while the equity market was drinking "Fed cuts solve everything" Kool Aid, the bond markets were signaling a different story. I remember repeated blog entries wondering how the market was not falling when the bond market was signaling bad things. Then in a span of 3 weeks in 2008 it appears the bottom fell out. Well humans are very pattern oriented, so we are in another phase of Kool Aid now. This time we are told to not fight the Fed. Just like we were told in August... October... etc etc.

Again it's a matter of perspective. If one believes this recession talk is nonsense, a media creation, and the US consumer will be fine once he is loaded with free money from China... I mean bonds sold to China because the US is broke... and refinancing boom 2.0 will save us, it's all upside from here in homebuilders, financials, and retailers. If not, you just sit and wait patiently for the impatient toddler that is the equity market to look to the bond market as its scolding parent and frown once again. We shall see how it plays out.
  • The risk of bankruptcies among the big US homebuilders has risen sharply as the economy has weakened and an end to the housing slump remains distant.
  • Credit default swaps on homebuilders, which act as insurance on corporate debt, suggest some of the biggest are at risk of failing to keep up debt payments. According to Byron Douglass, an analyst at Credit Derivatives Research, the most exposed are Standard Pacific, Hovnanian (NYSE:HOV) , Beazer, and Meritage. All are among the top 15 publicly-listed US homebuilders.
  • Mr Douglass said bankruptcies were "highly likely" among top homebuilders. Homebuilding is viewed as being the sector most threatened by the slowdown as housing has been the worst hit part of the economy.

One of 13 2008 Outlier Predictions made in December was not 1, not 2, but 3 major homebuilders go under in 2008. However, my prediction was made assuming free market capitalist society was allowed to reign. Obviously, that is a very bad assumption in 'socialist' USA, where no one is truly allowed to pay the price :)

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