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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Jim McMannis who wrote (21839)	1/20/2005 2:09:26 PM
From: mishedlo	Respond to of 116555

Heinz on GM as for GM, this company remains a bankruptcy candidate. a bust of the housing bubble would almost certainly do it (GMAC's exposure is enormous). its debt to capital ratio is downright frightening. what's more, it is not alone. many of the fomer industrial giants that have become giants of EZ credit finance could get into trouble. note also, the long touted 'measured pace' and aggressive short end accommodation by the Fed has had the side effect of shifting a lot of debt down the maturity spectrum - the need to constantly refinance, and the tightening short-long spread both could wreak havoc with a lot of balance sheets - and GM's surely is among the most problematic.

To: Jim McMannis who wrote (21839)	1/20/2005 2:58:57 PM
From: GraceZ	Read Replies (2) \| Respond to of 116555

By the time they do it won't be any cheaper where they want to go. Depends on where they want to go. Mexico doesn't show any signs of moving to a higher standard of living than we have here and this is the most common destination for US ex-pats looking to retire cheap. Mexico would have to have some serious structural changes to ever challenge the standard of living of its Northern neighbor. 28 years under the PRI makes this highly unlikely unless the people and the laws undergo some serious reforms. You are certainly far more optimistic than even I am for the undeveloped world if you think that the US won't continue to have a higher standard of living than 80% of the world's population. The question will be, do you want to live where it is cheaper? China? India? Africa? If the Chinese economy grows at the blistering 10% pace it is growing now and the US flounders around 2%, how many years would it take for the GDP per capita of the two countries to be equal without a major currency re-adjustment? Their economy, in dollar terms, is equal to the gross state product of California only it is spread over 1.4 billion instead of 35 million. Even if you use the purchasing power numbers to compare, it would be impossible to pass us any time soon in per capita GDP short of us having another Civil War which would destroy most of the capital infrastructure. The greatest economic disaster in our history (aside from the Civil War) was the Great Depression. The economy shrank by a third over three years and pretty much so did every other developed country so not much changed in comparative terms. As Japan's economy came into prominence in the 1970s- early 80s, the US floundered with double digit inflation but eventually went back to its historical growth rate when inflation was brought under control. It would have been very difficult for Japan to grow without the US growing as well because they were essentially locked out of the European markets. We're now in the same symbiotic relationship with China and India, those two economies can grow but not without us growing as well since the EU still protects itself from cheap products far more than we do. The Asian economies seem determined to make their growth dependent on exports, like Japan did, instead of growing the way the US did, internally. This makes their prosperity dependant on our continued prosperity. They get a lot richer and we get incrementally richer. Even though the US exports more than any other country in the world, our economy is not as dependant on exports for growth as the EU or Asian countries, exports are a much smaller percentage of our GDP. Chindia will get relatively more prosperous, but its near impossible for them to surpass us in our lifetimes in terms of per capita GDP. It is per capita GDP which determines the wider measure of cost of living. There will be many cheaper places to live in the world than the US in the future, as there is now.

To: Jim McMannis who wrote (21839)	1/20/2005 3:14:30 PM
From: mishedlo	Respond to of 116555

The Walmart of Homebuilders - A Post by Rodger Rafter I listened to the the D.R.Horton (DHI) conference call with great amusement today. They kept talking about how much bigger and better they were than other homebuilders, but to me they just seemed more arrogant and overconfident. They boasted of being the first builder to close on 40,000 homes in a year (2004) and promised repeatedly that they'd close on over 50,000 next year. They're confident that they'll close on over 100,000 homes in a year within the decade. They can do it if they keep growing at their total 2004 rate of 16.84%. However their Q4 closings were only 4.74% higher than the year ago quarter, so things appear to be slowing down. Several analysts questioned that and other red flags in the trends within their numbers. Their standard excuse was "We're not going to give a weather report." I took that partly a cheap shot at Hovnanian and partly as just a way of dodging questions. They used it about 10 times, and when analysts were more persistent, they fell back on the old standard "We had a great quarter," and the less standard dodge of "There isn't anything to be ashamed about in these numbers." One investor who pointed this out to them late in the call got a very hostile response from the execs, who added that the shareholders would be the judge of whether or not they were giving enough information. DHI says they now have about 290,000 lots under control, which they claim is a 4 year supply. One analyst quoted their founder as saying that 3 years was the limit of what was safe. Management told the analyst that they were wrong and that they'd hold 50 years worth of supply if they could do it all under options. They did admit earlier in the call that holding land was the riskiest part of the business. Land controlled went from 60% to 52% options this quarter because of a huge land deal in Arizona that moved lots from the options to the owned catetgory. I've often heard options given as an excuse for why homebuilders aren't taking on much risk. Still, if there is a slowdown in the housing market, land goes down in value, the loss is a relatively small percentage of the total asset value. If they bail on a contract, then everything they've spent on the contract and preparing the land for development is a write off. They don't seem nearly as safe as they are being made out to be. On the other hand, they were asked if they thought the Florida market was "sophisticated," to which they replied yes, because they were able to negotiate more land options there. They complained about California, where they had to purchase much more land, because land owners weren't as interested in options. If the options are such great deals for DHI, what makes the options sellers "sophisticated?" According to DHI all of their markets are strong. Nationwide cancellations were up from the historical upper teens to the "low twenties, err, umm, twenties (read high twenties) entirely due to Las Vegas." The Las Vegas situation, nevertheless, would reverse itself soon because "5000 people are moving there every month," and "We're not going to give a weather report." When asked if Arizona could face a slowdown like Vegas because virtually every major builder was expanding there like crazy, they simply said it wouldn't. At one point they said their goal was to be "The Walmart of Homebuilders." While they are slightly larger then #2 Lennar, they still only make up about 2% of the entire US market. They are hardly in a position to dominate. One of their goals for expansion is to try and muscle in on the markets that aren't served by the other big national builders and undercut the established local builders to squeeze them out. While this may contribute the growth they seek, they are probably going to find that they are late to the party and that they'll be taking losses on their expansion efforts. They kept talking about how great their regional managers were, and gave them credit for their growth and success. The gave themselves credit for creating a set of incentives for regional managers who improve profits and sales. Of course this probably means that the regional managers are being overly aggressive and presenting a rosier outlook than is warranted because that's what the top brass wants to see and its what will get them their bonus checks. These same regional managers are being asked to lead the charge into the smaller markets from nearby larger bases. I've listened to 3 homebuilder conference calls in the last week. The MDC guys seemed overconfident and set on expanding aggressively to boost profits. The Ryland guys were lower key, but had action done a better job on execution, mainly because the bulk of their development was in the faster growing Southeast. The DHI guys have the most development in the West and their numbers are showing the most signs of weakness, nevertheless they were bar far the most brazen, arrogant and overconfident of the bunch. If they do meet their goal of selling 50,000 homes, they are going to have to do it with a lot of discounting or through acquisitions because their markets are saturated. It'll be a pleasure listening in on their future meetings to see them face tough questions and go deeper into denial. Most homebuilders are down more than the market averages today. I'm gradually moving a bigger percentage of my shorts out of builders and into mortgage lenders. 10380 looks like support for the Dow, so it would be a good point to buy back a few builder shares and then short some more financials after the next little rally.