Bankrate.com: Average Joe Still Can't Afford a Home

This is the quandy I've been pointing out multiple times... with a "normal" mortgage, with a "normal" down payment, many people are still priced out of most major urban areas, even with this first wave of price reductions. [What Should Median Home Prices be Today?] This is why homes still need to go down substantially in many (not all) areas.... the lowering of wages through a move to "service economy" only exaggerates the issue. Now here is the interesting story developing. As home prices closer to major cities got out of reach, the working class (teachers, policemen, et al) moved farther and farther away... this way they can still have their 2500 sq foot house, offset by a 45 minute, 1 hour, 1 hour + (especially in CA) commute. Now those same people need to deal with $4 gas. Uh oh. What breaks? The GM Volt can't get here quick enough....

I continue to say the best thing for middle class America is a sharp reduction in home prices; while the period of downward adjustment would be painful - a lower price level and lack of speculation keeping home prices permanently "low" with just mild yearly appreciation would allow people to save.

• Normally, you'd think dramatically falling prices would make homeownership possible for more moderate-income families. But even with homes more affordable, the median price in many markets is still out of reach for a median-income family.
• Comparing housing costs in 210 metropolitan areas with the wages earned by workers in 60 occupations, the study found that homeownership is often unaffordable for workers in each of the five-fastest growing occupations -- registered nurses, retail salespeople, customer-service representatives, food-preparation workers and office clerks. Registered nurses, who typically have high salaries, were unable to purchase a median-priced home in 108 of the markets. (think about that for a minute, other than nurses are we happy that the other 4 categories are America's fastest growing type of jobs? Not exactly the type of jobs that create a move up and out of middle class)
• "Even with the housing downturn, the drop in prices still just isn't enough for many workers in traditional backbone occupations to afford houses," says Rebecca Cohen, a CHP research associate.
• In many parts of the country, housing increases have outpaced wage growth for almost a decade. Census data released in 2006 revealed that between 2000 and 2005, the burden of housing costs grew sharply.
• That's because the median price of a home in 2000 was $139,000, but by June 2007 prices peaked at a whopping $229,200. In those seven years, the median price of homes increased 64.9%, while median incomes rose just 16.6%.
• The study also found that retail salespeople and food-preparation workers couldn't afford to rent a two-bedroom apartment in any of the markets. (but those are our fastest growing type of jobs???)
• Recent mortgage innovations and Americans' appetite for debt have created the illusion that homes are affordable and within reach of anyone, regardless of income. But just because a family purchases a house doesn't mean they can afford it, and those who borrow as much as they can may have to make other budget cuts that affect their financial futures. (yes, I like that word... illusion)
• The fact that a bank says you can afford a home doesn't necessarily mean you can, Barakat says. A lender is concerned about an applicant's ability to repay debt; it has no interest in whether there's enough money left for the borrower to send children to college or to invest for retirement. Many homeowners fail to recognize this and buy homes at the expense of other liquid assets and investments. (goes back to the crisis that is our national financial illiteracy)
• For the first time since the Great Depression, Americans have a negative savings rate of 4%. It's been captured or stolen by high mortgage payments," says Barakat.
• Cutting back on outings and vacations may decrease the fun in life, but saving less and putting away less for retirement also increases financial risk.
• Sean Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida, says affordability evaporated in some areas that saw rapid price increases over the past five years. In many parts of the country, home prices have risen to such levels that many middle-class residents have little choice but to move farther outside the city, increasing their commutes.

Again I apologize for dropping in these pieces of reality into the blog. If I were a good financial pundit I'd simply say "everything will be fine in 6 months, rebate checks coming next week, everything is so rosy I can almost cry." So please enjoy and smell the roses along the way, the boom is soon here.

Bookkeeping: 'Rising Tide' Performance Week 38

Week 38 performance of the mutual fund

Comments: One more week until our 3rd quarter of life closes and it was a solid week. My goal entering (any) earnings season, but especially this one is simply to stay afloat, not give back much of our gains, and try to keep close to the pace of the market if it remains strong while holding good amounts of cash and hedges. So far, two weeks in, it has been working. With 50 some names on the long side we usually will encounter a few blowups in earnings along the way - that is just probability, but none so far.

As for the markets it was a bit of a sleepy, rangebound week. S&P 500 level 1400 remains a ceiling but we almost got there late Friday with a push to 1399.11 before pulling back a bit... oh so close. The majority of the week was dominated by ignoring all bad economic news, and clutching to the strength of US multinationals as reasons to hope for the US economy. Domestic based companies have lowered guidance so much that their "better than expected" reports were cheered, even though year over year comparisons are quite awful for many of these companies. I spoke of a potential rotation shaping up [Sector rotation?] and the strength in financials and especially retailers continued Friday. I guess hope never ends for those rebate checks (hello, those will be used in gas stations and grocery stores) - but I guess news that these will be out earlier than expected was enough to push up the retail stocks. Whatever the reason is moot - it is what it is. Aside from that we had a massive, 6 hour sell off in commodities... what a "correction". While I wrote about a week and half ago that I expected the Fed to stop cutting rates after this meeting and the dollar to bounce - by the middle of this week I was reading that logic EVERYWHERE - which probably means the dollar won't bounce after all since everyone is already anticipating. Or that flub of a bounce this week was "the bounce". If so, the US consumer is in even worse shape. But great for those multinationals! Here is the problem - after next week, we are pretty much done with multinationals and are going to need to rely on (plug your nose) American companies who rely on Americans. Boo. Hiss.

For the fund, I stood conservative most of the week, but once the "correction" in commodities occurred, I took the opportunity to rebuild some positions in coal, iron, fertilizer, etc. Somehow these stocks cannot keep going up (can they?) without a more meaningful correction.... but I've been saying that for a few weeks now. So we need to make hay while we can, realizing a correction, when it comes, will be swift and punish the portfolio. In the meantime I drank some Kool Aid and bought some investment banks to help balance out the portfolio allocation away from commodities. Thursday, I was looking at some Kohl's and JC Penney based on charts, but could not listen to the devil on the shoulder to buy those. As I wrote in my sector rotation piece, if I were a very short timing hedge fund I'd probably go into retailers for a week, enjoy the Kool Aid, get my 10% move, and leave. But that's not our strategy here. (but it would of worked nicely through 2 days) - today alone Kohls up 5%, Ralph Lauren Polo 4.5%, Coach 4%, JCPenney 3%. Once these rebate check dreams fall flat on their face we'll have an excellent shorting opportunity in these same names....

This week the S&P 500 gained 0.5% and the Russell 1000 +0.6%; with much of our portfolio in cash or hedged in short exposure (except for Friday) Rising Tide Growth Fund was able to gain 0.8%, so we returned to a week of absolute and relative (vs indexes) gains. One more week and we are 75% of the way through year 1. My goal of beating the indexes by 15% remains intact.

As an aside, blog traffic really took off this week. If you are new (or not so new) and enjoy the blog, please read this post on how to pledge a future investment. I also posted an entry earlier this week on how I am doing compared to my peer group of "mid cap growth" mutual funds thus far; I'll update that monthly.

Price of Rising Tide Growth: $11.818
Lifetime Performance to date (vs Aug 3, 2007): +18.18%

Comparable S&P 500: 1,397.84 (-4.60%)
Comparable Russell 1000: 762.52 (-4.23%)

Fund return vs S&P 500: +22.78%
Fund return vs Russell 1000: +22.41%

Last week's results here.

Since the market cap of the median stock in the Rising Tide Growth fund (median $7.1 Billion as of April 08) is significantly below the SP500 index (median $13.1 Billion as of September 07) but higher than the median market cap in the Russell 1000 (median market cap $5.8 Billion as of September 07), I am measuring the fund against both indexes. Click here to see all fund's holdings as of April 2008.

Basis for indexes is 5 day weighted average of closing prices Aug 3-9
SP500 : 1,465.2
Russell 1000 : 796.2

To see why I use the 5 day weighted average of the first 5 trading days to smooth out the volatility of the indexes as the fund launched, see here.

Please click here: fund performance for previous updates

Bookkeeping: Selling Diamond Offshore (DO) - Will Buy Noble (NE) Later

I am closing my smallish 0.5% stake in oil driller Diamond Offshore Drilling (DO) after yesterday's "decent, but we still missed" earnings. I take that as a sign they are not managing the Street's expectations very well. While all the oil service plays should move together (i.e. if crude continues up, I am sure this name will continue up) I prefer to stick with the better performers.

I've had Diamond Offshore since day 1 of the fund, and somehow managed to lose $2200 on it. This is a 1 year chart, and since August its done ok, but my timing of trades on this issue has been poor to have lost money. While this has been in the portfolio for a long time, it has never been a huge stake. (chart is not working, I'll update this post later)

I'll most likely replace this name with Noble (NE) which had "better" earnings and has a very nice relationship with Petrobras (PBR). But since Noble is very extended I am not going to do this "flip" today. Both stocks have returned about 10% in the past 6 months, so it might a moot point frankly. I still think this entire group is undervalued and they are being priced as cyclical companies, in a secular growth environment. Noble for example has multiple years of backlog waiting, yet people are pricing the sector as if crude is going back to $45 in a few months. This has been my frustration with the entire sector for quarters on end.

• Noble Corp (NE) said on Wednesday its first-quarter earnings rose 54 percent, exceeding Wall Street estimates, as oil and gas exploration companies paid higher day rates for its offshore drilling rigs.
• Profit soared to $384 million, or $1.43 per diluted share, from $250 million, or 93 cents per diluted share, in the same quarter a year earlier.
• The average daily rental rate for the company's rigs jumped 35 percent from a year ago to $163,772.
• Sugar Land, Texas-based Noble added almost $5 billion in possible revenue backlog during the first quarter.
• Noble has 62 rigs operating in areas including Brazil, the Middle East, India and West Africa.
• Noble (NYSE: NE) lining up a massive contract renewal on five deepwater rigs that are already in Petrobras' service. The deal adds up to roughly $4 billion of revenue potential across 29 rig years, with individual contracts extending out as far as 2016.
• The huge backlog addition allows Noble to undertake some major refurbishment work on three of the rigs.
• Click here to see the graph of how much dayrates will rise for Noble in the Petrobras relationship

Long Petrobras in fund, no personal position

Bookkeeping: Adding more Mechel (MTL) on the "Pullback"

While still in a primary bear market, I just have to consider these commodity charts to be in their own bull market. While I'd prefer to buy around the 50 day moving average, in a bull market, you just have to be happy for a pullback to the 20 day, which is what we got today in Mechel (MTL). As opposed to buying some other names that are still nowhere near support at least we have a stock price near some support level here, so I am adding to one of my favorite names. The stock is down about 12% from peak way back.... Tuesday. I missed the exact top but cut back near $159 [Apr 22: Off with Some Mechel], so I'm getting back my position at 9% discount and away we go.

I'm adding in the $144-$145 range and moving Mechel up from 2.4% to 3.1% of the fund.

I began this company in early November 07 [Nov 5: Two New Foreign Positions Added Today], and frankly it's grown into one of my favorite ideas - much like the fertilizers and Apple (AAPL) I don't really keep up with the daily news on these, knowing it's going much higher over time - with the momentum trader bumps along the way. Unfortunately, Cramer discovered it as well but it still seems to be a relatively good secret (Yahoo message board volume is about 2% of fertilizer stocks or solar stocks for example) Talk about being in all the right places (steel, coal, iron) at all the right times with a totalitarian ...err, I mean friendly democratic... government at your back. Now if they only bought a Russian potash mine...

Some earlier posts...
[Dec 12: Mechel Reports Earnings, Considers Mining IPO] & [Apr 9: Mechel Continues to Acquire Most of Eastern Europe]

Long Mechel, Apple in fund; long Mechel in personal account

We're Stuck! S&P 500 Range Bound to the Extreme

This chart says it all. We continue to have trouble peeking our head over S&P 500 level 1400. And 4 of the past 6 sessions we've hit or come within a whisker of 1370. Talk about a narrow range - thats 2.2%. On the plus side the longer we hold above the 50 day moving average (1355 and rising) the more bullish it is, but we really need to start getting moving... 200 day moving average is up ahead as resistance @ 1435 if we can ever clear 1400. Otherwise we're stuck for now. It's hard really to make any short term call either way; we could just as easily pop over that 1400 and make a good solid 3-4% run, as we could fall back 3-4% down to 1355. Not much of a hint either way, back to "white noise" areas on the charts. Sort of snoozer action right now.



What's working today? Stop me if you've heard this before... coal, natural gas, fertilizer. While I'm happy because I re-upped these positions yesterday I still would prefer to take some short term losses and see these names correct a meaningful 15-20% to load the boat, while everyone shrieks on CNBC about the death of commodities, and how the dollar is going to strengthen to par with the Euro within months. Our US peso is so inept it can't even create a 3 day rally... and looks like our "Economist in Chief" (it's just a mild slowdown, a patch in the road) wants to go out with 3 wars on his hands... no better way to end a tremendous era. Oil Prices Up on Word US Ship Fired on Iranian Boats. I try not to be political here because that is sure to turn off 50% of the readers (and my thought process is 95% of "them" are terrible for "us", regardless of party) but can I please utter "Cmon January 2009... please get here."

As an aside I don't normally comment on surveys, but hmmm... Consumer Sentiment worst in 26 years... you mean like the early 80s? The last time we had stagflation? Nah, never. We don't have either (a) a recession OR (b) inflation so how could we possibly have both? Nah. Impossible.

• Consumer confidence fell for a third straight month in April, hitting its weakest in 26 years, on heightened worries over inflation and the sagging housing market, a survey showed on Friday.
• The April result is the lowest since March 1982's 62.0, when the "stagflationary" period of low growth and high inflation was still an issue for many Americans
• "More consumers reported that their personal financial situation had worsened than any time since 1982 due to high fuel and food prices as well as shrinking income gains and widespread reports of declines in home values," the survey said.
• "Never before in the long history of the surveys have so many consumers reported hearing news of unfavorable economic development as in the April survey."
• Nearly nine in 10 consumers thought the economy was now in recession, Reuters/University of Michigan said. (thankfully, 1 in 1 Economists in Chief don't believe so)

Thankfully everything will be fine "in 6 months" or I'd have to be worried. Let's get this stock market going up... everything... will... be... fine. It's all discounted baby.

Excellent Piece on Vale (RIO) in WSJ Today

I need to begin calling CVRD by its new name Vale (RIO)... I am still used to the old name it has held in the past. Either name, an excellent in depth piece in today's Wall Street Journal on the company. As my "World of Shortages" theory plays out over the coming years [Sept 27: Shortages Here, Shortages There - Iron Ore is the Shortage of the Day], the "value" of the inventory in the ground that the 3 major mining titans own, will only increase. And as I've said many times it is a darn shame very few Brazilian stocks are available to American investors.

Some earlier posts on this name [Feb 19: CVRD Secures 65% Increase in Iron Ore Pricing] & [Mar 26: CVRD Pulls Out of Xstrata Deal] Again, while I like all commodities I think you cannot just throw a dart - wheat is very different from gold, which is different from copper, which is different from potash. While both copper and iron ore are base metal commodities the former is priced on the spot market, while the latter is mostly in long term contracts. Since I'm a conservative chap I like having 65% 1 year price increases locked in and not being thrown about by the hedge funds as they decide copper is worth X today and X-10% in a week and X+15% 4 weeks from now. I am actually adding a layer into my Vale position today, as the stock has pulled back to its 20 day moving average of $37. This takes it from 1.3% to 1.7% of the fund. I am hoping to see a price of $35, or its 50 day moving average, before adding in any more scale. Plus again, I still anticipate some commodities weakness shortly which should afford us some better entry points.

Unlike some of the other names in the fund this is a relatively slow mover due to its huge size but much like Brazilian brother Petrobras (PBR) one of those mega global giants that are going to be benefit for many years. While I generally don't like buying such huge companies (by market cap) since the potential for appreciation is more limited than smaller fare, these 2 are just too good to pass up. These companies also highlight another of my favorite themes - "reverse colonization" (grabbed this term from Minyanville last year so I can't take credit)- former Western powers assets are now going to be gobbled up by the formerly "2nd and 3rd" world countries they once dominated. Case in point will be the assets America has and will continue to sell off to pay for its major structural imbalances to budget. Irony at its best.



This is a very lengthy article so please click the link if you want the whole thing; some Cliffs notes below

• When Companhia Vale do Rio Doce arrived in the small Canadian mining town of Sudbury a year and a half ago, Mayor John Rodriguez recalls wondering: "Who are these Brazilians?"
• As the Rio-based mining giant muscles its way to the front of the global business stage, more and more people outside of Brazil are finding out. In 2006, Vale swallowed Sudbury's biggest employer, nickel company Inco, for $17.8 billion -- and set out on a campaign to win over the town's skeptical residents. Vale is now the world's second-largest mining company, and the biggest maker of iron ore, a key ingredient in steel.
• Late Thursday, its push to diversify beyond iron ore came back to bite it. The company reported first-quarter net profit of $2.02 billion, down 8.8%, which it blamed in part on a drop in nickel prices and losses from trading positions related to certain commodities.
• Like many mining companies, Vale is vulnerable to fluctuations in metals prices. But Goldman Sachs analyst Oscar Cabrera says Vale also struggled this quarter to boost production at the pace expected by the market, failing to produce as much iron ore and nickel as expected. During the second quarter, newly negotiated iron-ore prices are expected to boost revenue.
• Emerging-market companies such as Vale have been climbing the ranks of the world's biggest and most successful firms in recent years. With China's booming economy boosting demand for raw materials and other commodities, companies like Russian steelmaker Severstal and Brazilian pork and poultry processor Perdigão SA have prospered. Prices for Vale's iron ore have risen by double-digit percentages in four of the past five years, and this year's price hike of 65% is expected to add as much as $12 billion to annual revenue.
• Using their new financial clout, these once-obscure emerging-market companies have been buying up firms around the world. Last year, they struck $294 billion of such deals, up from $40 billion in 2003, according to research firm Dealogic.
• Brazilian steelmaker Gerdau SA bought Chapparal Steel Co. in the U.S. for $4.4 billion. Mexican cement maker Cemex SA took over Australian construction group Rinker Group Ltd. for $16.7 billion. Last month, India's Tata Motors Ltd. bought the Jaguar and Land Rover luxury brands from Ford Motor Co. for $2.3 billion. (reverse colonization)
• According to Dealogic, Vale's purchase of Inco is the largest-ever takeover by a Latin American company. In late March, Vale dropped its effort to buy Swiss rival Xstrata PLC for more than $80 billion after the parties failed to agree on takeover terms -- a deal that could have made it the world's No. 1 miner, overtaking rival BHP Billiton.
• Vale has been growing at a torrid pace. Last year, it hired 9,281 new employees in Brazil, leaving total employment world-wide at 124,013. It mined enough iron ore to fill 50,000 Olympic-size pools, and generated $39.7 billion in revenue -- nearly 10 times what it did in 2001.
• According to a February securities filing, Vale shares were the largest single holding of George Soros's Soros Fund Management LLC, which held $238 million in shares.
• Steelmakers had long held the upper hand in price negotiations with ore producers. But booming demand from China turned the tables. Suddenly "there was a Chinese on every corner looking to buy ore...and willing to pay any price," recalls Mr. Stoliar, Vale's former planning director. In 2005, the price steelmakers paid for ore rose 68.8%, nearly doubling Vale's profit that year. Ore prices have continued to rise, at a pace Vale executives admit they never imagined.
• The growing demand for metals plays into the hands of the biggest producers, which can make the investments necessary to open new mines, many in remote areas of politically unstable countries. The cost of mining also has been rising. Prices have leapt for everything from explosives to the big off-road tires used on mining trucks, which can cost about $15,000 apiece. Vale estimates that the cost of opening Southern Range, a new Brazilian iron-ore mine that isn't yet open, has risen to $10 billion, from $2 billion several years ago.

Speaking of reverse colonization, let me leave you with this graphic below. And again, as commodity prices rise worldwide, sovereign wealth funds and governments of these natural resource rich countries only gather more wealth in a great transfer of wealth [Feb 2: $2 Trillion of Petrodollars Need a Home This Year] from countries that need said resources. And they then use that money to come back and buy the assets from underneath those same countries. In the context of this chart you can see what an indignity it is that our government fights off solar investment and the like... oh well, we get what we deserve as detached voters who let the politicians run amuck. I mean we have very important things to worry about, i.e. whether Obama wears his lapel pin with American flag or if Hillary went hunting with her daddy when she was 7. Stuff like that...



(click to enlarge)

Long Vale, Petrobras in fund; no personal position

Natural Gas: Another Sector that Won't Quit - Southwestern Energy (SWN) +15%

Much like fertilizer, I've been waiting (im)patiently for a pullback in the natural gas group.

While I've been devoted to coal since early last fall, I missed the first part of the natural gas move but woke up to the movement in mid February [Feb 11: An Interesting Development in Natural Gas]

I posted the charts of 6 stocks (this is a very large sector with many large, medium and small players) whose charts were beginning to show some very interesting strength. Let's look at the price appreciation since

CHK +30%
DVN +25%
EOG +35%
KWK +27%
RRC +15%
SWN +39% (with today's spike)

I was a bit skeptical of the early move, so it took me some time to begin to "believe" and I created 2 positions a month later [Mar 17: Beginning First Natural Gas Play - Cabot Oil & Gas (COG)] and [Mar 19: Second Natural Gas Play - EOG Resources (EOG)] I have only had about a 2% stake with these 2 combined so I believe I really missed the boat on this one. Since then I've been waiting for this pullback than never arrives.

I'm still wondering what exactly is driving this group - my guess back in February was perhaps as some coal companies are moving from 10% of production for export to 30%, that is leaving less "energy resources" in the US, which natural gas is coming in to fill the "relative shortage"; coal being much easier to transport overseas. Or it could just be tracking up with the massive move in crude. Either way, with results like this from Southwestern Energy (SWN) - you just have to sit back and applaud.

• Southwestern Energy Co's (SWN) quarterly profit more than doubled, beating Wall Street expectations, helped by an increase in production and higher realized natural gas prices.
• The company raised its second-quarter natural gas and oil production outlook.
• For the first quarter, the company reported net income of $109 million, or 31 cents a share, compared with $51 million, or 15 cents a share, a year ago. Analysts on average were expecting earnings of 25 cents a share, before items, according to Reuters Estimates.
• Gas and oil production rose 71 percent to 39.1 billion cubic feet of natural gas equivalent (Bcfe).
• Southwestern's average realized gas price was $7.70 per thousand cubic feet (Mcf), including the effect of hedges, up from $6.71 per Mcf in the same quarter last year. (consider the spot market price is north of $10 and you see the earnings power coming in the future)
• Average realized oil price was $96.55 per barrel, compared with $55.17 per barrel in the year-ago quarter.
• The company raised its second-quarter natural gas and oil production outlook to 41.5 to 42.5 Bcfe, up from 36.0 to 37.0 Bcfe.

What I really like about Southwestern is their ability to not only partake in the price increases, but increase their production. This was one I seriously considered but definitely a lost opportunity. Hopefully we get some panic in this group as the dollar "strengthens" ;)

Long Cabot Oil & Gas, EOG Resources in fund; no personal position

Shoes Beginning to Fall in the States

This is a theme I have been prom