4. Homebuilders have officially bottomed, Chimp Contest ends next Friday!
Chimp Contest - How to Lose Money
The Chimp Contest payout of $500 big dollars comes to an end next Friday - Sept 10th at 4pm. It has been exciting 6 months tracking the contest.
First, I placed a small bet on an early Chimp leader, IKAN, only to watch myself lose about $2,000 faster than a crooked Vegas craps table. Not only did I buy that piece of crap close to its peak on 4/14, but it immediately trended south and south and south until finally, it reported an earnings miss. That was nice.
So technically, the Chimp Contest is costing me $2,500. WTF!!!! I will be taking that extra $2,000 out of future contests. Please see Ultralong to voice complaints (his pick).
Secondly, my CAPs score went deep into the red and has never come up for air. In my next contest I am going to have some rules as to stocks picked because obviously many of you are very bad at picking stocks. REMEMBER, you were supposed to give me your BEST pick not your BEAST pick. The good news is that I was only foolish enough to buy one of these turds. I even documented my stupidity on my IKAN pitch section including the infamous buy day.
Chimp Contest Leaderboard
We are in a virtual dead heat between ARNA (Donnerv) and KRO (Generaldemon) on the leaderboard with 6 holes to go. Hopefully neither of you is dating a Perkins waitress. Additionally, there are two other stock picks that could pop in the next 6 trading days to compete with our dead heat leaders. Everyone else is flailing, so don't expect Dell or HP to come to your rescue.
To the person or monkey that wins this contest. Please email me a mailing address, an email address and who the check should be written out to. I have activated the email feature of this profile and you will receive a response from me via the email address you provided. These are simple instructions so don't screw it up.
The next contest will begin when the winner of this contest acknowledges receipt of the winnings. I run a respectable, clean operation here. I don't need any trouble. The women are examined twice a week, I don't allow the use of narcotics, and no video taping. I'm serious!!!! Let's not screw up a good thing here.
Homebuilders Have Officially Bottomed
I started blogging under Floridabuilder2 in August 2007. Previous to that I shared my bearish predictions on Yahoo messsage boards beginning in January 2006 (under a different profile than Floridabuilder). That is 4 years and 8 months of being a bear in housing. Since then, I made several technical bottoms and/or fundamental bottoms based on what the homebuilders were going to report and how I felt the market would receive these reports. After all the inside scoop was the good or bad was the whole point of my blog.
However, I have always been a bear.
After the Lehman collapse on Sept 2008, I closed all my active CAPs picks and stated "I will slowly green thumb the best builder stocks until one day all of the builder stocks I rate are green, marking the offical bottom." The first green thumb was on October 2008 and offically in August 2010 I closed my last red thumb builder stock. The only two builders I haven't rated are HOV and CHCI because both these companies really suck. Did you see HOV's earnings report yesterday/Wednesday? Obviously, I am correct that this is the worst run builder in the industry.
Taking A Lot Of Crap For Over 4 Years?
I took a lot of Crap from bulls during 2006 and 2007 on Yahoo. I know Yahoo message boards are where the undesirables of our society reside, but poo is poo. In January 2006 while still working at a public builder, something strange happened. I was doing my weekly review of all the markets in the US and was shocked to see sales slowing virtually everywhere. I am a data whore and switch was flipped over night on the bubble. I'm not sure what triggered it, but there were almost no exceptions. This was big. I'm talking Loch Ness Monster or Crop Circles BIG!!!!!!
Yet even though I went to the boards with reams of data points from one of the largest public builders in the US the bulls called me a liar, a short seller, an employee with a bone to pick, a disgruntled homeowner, a Guatemalan. I had the last laugh as we all know
Later, my new home on CAPs was met with little fanfare. Yet I was well received because I was playing to the crowd with my predictions of "more pain", "specific bankruptcies", "lying CEOs", and "cooked books".... I felt like Shirley Temple felt like at the peak of her career in Heidi or when she sang Animal Crackers. No longer an outcast, I was on stage with my black patent tap shoes. Tapping away like the River Dance monkeys.
However, the CAPs blogging crowd wanted more blood..... fresh meat..... Soon I was no longer the cute child actor, but the troubled teen with a drug problem. I wasn't bearish enough, I wasn't stating all the homebuilders would go bankrupt, I wasn't calling for the end of the world.
The fact is once the initial bankruptcies took place, I understood the business well enough to know that most of the builders would be able to convert assets to cash and survive regardless of how bad things would get. Seriously, you don't things got bad in housing? Yet only the most leveraged public builders went under (around 20% of all public builders). In one of the worst housing markets since the great depression.
Why I Green Thumbed All Builder Stocks
First lets go through the bad news.... more foreclosures, another 5-10% drop in home prices on average in the major markets that count, a reduction in home ownership, persistent high unemployment, an over supply of empty homes. Yet none of these things matter.
Under my Floridabuilder2 profile the builder stocks I green thumbed will vastly outperform the SPY in 5 years. Remember, 4 years and 8 months ago I started saying things were going to get bad real fast. 5 years is not a long time in Giant Tortoise years.
Just like I was right stating builders would crash, just like I was right naming specific bankruptcies, just like I was right walking people through why most public builders would survive with large cash positions, just like I predicted this past Spring that homebuilders would plunge in price.............. I am 100% positive builders will not trade lower than their Summer of 2010 lows.
The only exception I will throw out there to my prediction is if the US continues to print large job losses (tomorrow at 830am will be interesting). Even with no job creation, public builders have bottomed. We just can't take a step backwards.
Here are the reasons why they are good long term investments (5 year hold) and throw away the key.
1) 50 year low in sales. This Summer we built the fewest amount of homes in the past 50 years. Think about it. The population 50 years ago was drastically smaller and we are pacing fewer home constructions than 1960? In 5 years we will be hitting 1 million homes a year again and that is a 300% increase in sales potential across the industry.
2) Competition. 20% of the public builders went under. However, 85% of the private builders (my estimate through research) have went under. The private builders could not recapitalize like the publics due to how they are structured. The private builders also controlled 75% of the residential construction industry at the peak. So in the next 5 years, through many starts and pullbacks the remaining public builders will be able to grab massive market share in the void that was created. Assuming most of you can do basic math, just run the numbers in point #1 and #2 together. It should be noted that newly funded private builders are being created and realistically I don't think public builders will ever achieve more than a 40% market share of the industry. I explained the reasoning in my old Floridabuilder blogs and you have to trust me on this.
3) Input costs. HOV, the General Motors of public builders stated recently (for once they aren't lying) that they will be achieving returns above 20% next year. How is that if home prices have fallen so far? How can anyone make a profit? Because construction costs and land costs have fallen just as far or more. My partner and I bought a raw parcel recently for $500,000. In 2006 the private builder that defaulted paid $3.5 million for the parcel. I have run the pro-forma's and we will make an unheard of 45% gross margin. The industry even at its peak rarely had communities in the high 30% gross margin range let alone 40%. Why? Because there was only one other bidder and they wouldn't buy the property as is. So by default we were the only bidder. I had an opportunity to meet a private builder that made 100 million plus when he sold his company during the bubble years. I asked him what was the best deal he ever bought and he said 1994 from the RTC during the S&L crisis. My friends, do your history. 1994 was way after the beginning of the S&L crisis and this crisis is bigger. Well positioned raw land assets will be in the crapper for a long time. Input costs will remain low driving margins up more quickly than you think. Who do you think builds are homes? Americans?... LOL
4) Sales Pace. The biggest issue public builders have today is sales pace. Remember, the higher the sales pace per community the more you can spread your overheads per unit. Once we start seeing an uptick (remember we are at 50 year lows) in sales pace, this will begin driving SG&A down while margins above are going up. The profits you are starting to see from builders are not an illusion. Yes, some have bad assets on their books that they are hiding, but the net income spread is going to widen
5) Foreclosures don't matter.... Location, Location, Location. The ability to move to where there is demand. Most of you are familiar with Phoenix (habla espanol?). Most of you know Phoenix is one of the most distressed homebuilding markets in the country, easily. Go to Buckeye, Laveen, Glendale, Estrella, Avondale (google earth these cities) and you can get foreclosures in the $50-$60 square foot range all day long..... DO IT NOW.... GOOGLE EARTH..... so Phoenix needs no new homes right? WRONG. Gilbert (google earth it) has had over 1,500 new homes constructed in the last 12 months. One city with that many new homes built. These homes are selling for significantly more than the areas I mentioned. Why? Location, location, location. Homebuilders have the ability to buy land where people want to live or areas in the country where job growth is occurring and people are relocating. In other words, when someone leaves Detroit and an empty home there then moves to Dallas for a job where they need a new home. Then Detroit has a foreclosure and a builder has a new home sale in Dallas. People always ask me why am I building new homes, I am crazy. My answer? Because I am building homes in land constrained markets, with good schools and good paying jobs. I am not building homes in Detroit
6) Demographics. Do you really think we are getting rid of all the illegals? The US still has one of the youngest populations of the developed world. Our population is predicted to rise 10s of millions of people in the coming decades. Do you think these people are going to live in the sewers? This isn't Rio de Janeiro!!! This is America where we eat cows on steroids, people drive gas guzzling trucks, and we don't trust them people with towels on their heads!!!!! We're going to have a lot of babies and to he11 with our carbon footprint. So grab a case of Miller and a Fifth of Jim Beam, put on your orange vest, sit in that shed in the middle of F*cking Winter and lets build some houses. Or something that
Ok, whew..... That's a lot of typing. I think I can stop now.
Next Friday we announce the Chimp Contest winner....
Remember this.............. You can't change the world unless you have significant power. Spending time trying to change the world without financial benefit makes you a net loser. I will emphasize LOSER.
What you do control is your destiny. All your time should be spent enjoying the short life you have and taking actions that will enrich you within the macro economic world / conditions you live in. There is virtually an infinite amount of wealth on this planet. People have managed to accumulate this wealth in countries regardless of conditions. Make sure during this downturn you take the steps to build your wealth and not let a crisis be wasted.