enough is enough

[Bill Verburg]

Enough is Enough

[turbo6bar]

Risk is being repriced.

Two years ago, I predicted housing woes would eventually take down the economy. However, I never expected it to roll like this.

I wonder when the market will realize the environment has changed. It may no longer be feasible to grow earnings via stock buybacks.

[Dantilla]

I disagree with an underlying assumpion- That the lower and middle classes are struggling.

Starting off with an unsupported assumpion like that casts doubt on the entire article. While I'm sure there must be a few nuggets of truth buried in there, it is clear that the author's goal was to back up his own biases- Not a search for the whole truth.

[jyl]

Originally Posted by turbo6bar

Risk is being repriced.

Two years ago, I predicted housing woes would eventually take down the economy. However, I never expected it to roll like this.

I wonder when the market will realize the environment has changed. It may no longer be feasible to grow earnings via stock buybacks.

Don't think stock buybacks will be affected. Typical buyback is a company w/ $1BN cash, zero debt, strong cash flow borrows additional $0.5BN and does accelerated repurchase of $1.0BN in stock. Don't think credit risk has increased much on that $0.5BN of borrowing.

Think LBO and some M&A will be affected. That will be negative.

OTOH, looking at strong pipeline of IPO and secondaries in 2H07. If that dries up, is bullish for stock mkt.

[turbo6bar]

Originally Posted by Dantilla

I disagree with an underlying assumpion- That the lower and middle classes are struggling.

Call me a dumb redneck, but I didn't get that impression after reading the first few paragraphs. The rich are currently getting a bigger piece of the pie, for better or worse.

Gross' supposition is that "the rich" have been able to take advantage of mis-priced market risk (ie. package debt into securities with final price presuming no/little risk). Since risk is misjudged, the price for buying that income stream stays high. The market is encouraged to bring more debt. It goes on until it busts.

John, you could very well be right about stock buybacks. I briefly looked up HD. It has $2.0billion in cash. They recently announced a $22.5billion buyback. First, they will sell their HD Supply business for $10.3billion. The rest will be financed with notes issued, an estimated $12billion. This could very well be the exception, but HD is far from executing this buyback with cash on hand. In fact, based on the numbers above, HD will use virtually no cash to buy back stock. It will be interested to see how the market changes over the next six months.

I just noticed the buyback plan will remove nearly 30% of outstanding shares, so perhaps this is an extreme case.
Jurgen

[jyl]

The HD buyback is a bit extreme but not very much so. Numerous semiconductor companies I follow are repurchasing 1/4 to 13 of shares. Usually using 1/2 cash 1/2 debt, more or less. So, yes, debt has to be sold. But I think there is a continuing demand for debt from investors, and as investors re-discover the merits of cash flow and risk aversion, they'll flock to the higher-quality corporate debt. The debt that I think gets hurt is the speculative stuff that was until recently trading at record low discounts. Of course, I'm not a bond guy.

[tabs]

I am wondering why a Company would want to buy back its shares? Could it possibly be that they see them as a BARGAIN. Obvisously they are not going to buy them back if the price is too high..so they must see them as being reasonably priced. So what does that tell you about the valuation of the Stock Market if alot of companies are buying back their shares.

Mother down in Tucson is happy until the 3rd quarter of 08. After that well it will depend if we get a Socialist for President or not. That ought to put FEAR into the hearts of anyone who has a $ or 2 in your pocket and that includes the most bleeding heart mther fkers on this Board. I wana see some of them get their comupence when they see the economy tank and their RETIREMENT SAVING SHRINK.....will they somehow become more delusional thinking it won't effect them..in LA LA Land...Well my Liberla BUddies you can remain firm in your belief that Hitlery or Obama is going to take GOOD CARE OF U in your old age. I really will be LMAO when I see you all peddling around in a State RUN Old Folks Home...Ahhhhh Nurse Ratchet could I have another cup of Hot Cocoa.....Nurse Ratchet I think I'm having a Heart Attack...Nurse Ratchet, "Well tooooo fking BAD, we need your Bed for the next old Geezer.!"

[turbo6bar]

Can we agree that risk is being repriced now, or am I overreacting? My contacts in housing and lending proceed with drooped heads. It's just a matter of time before the real data filters down to the masses, affecting psychology and sentiment.

Let's presume Federal Reserve Chairman Bernanke decides a rate cut is necessary. How do I protect my cash? I don't need to profit. I just don't want to go under. My forte is investing in RE and since good deals are just down the road, I must stay liquid and agile.

Thoughts?

Jurgen

[RoninLB]

I'm no pro so this is just an observation.

RE mkt cycles historically between around a top of 2M new starts and a low of 1M. We still have more than 1M new starts. If i assume we will eventually reach a low of 1M and, some talking heads say, this is a "super cycle" then the down period hasn't even begun.

[turbo6bar]

No doubt that this down cycle will be far worse than any other.

The only question I have now is do I sit on cash and hope for the best, or drop a few toes into a short S&P500 fund? If it really is as bad as anecdotal evidence points, I should fasten the hatches now.

[on-ramp]

the "system" is complicated by design, so that only those that have created it can truly benefit from it.

[RoninLB]

the Fed Reserve created this mess imo.

it's more complicated on this RE cycle because the debt has been able to parcel itself off into small nuggets of derivitives that leaks through much of the debt market afai know.

Some talking heads speculate that the total hit to our economy will be $300B.

Currently I'm following my personal opinion leaders like Steve Forbes, Ken Fisher [Forbes mag], Brian Wesbury, and Larry Kudlow.

that bs said, around $300B is about the size of the hurricanes hit in the Gulf, the stock market will survive+, and cash in the RE market will soon be king.

as a side note.. at the peak of the last RE curve in the 1980s people were literally banging on my door in this small beach town offering me $275k. A year later the going $ for a sale of my house sunk to $180k. Right now the area is down about 10% from peak. The fast money is gone and only optimism remains in many minds. Banks are slowly raising standards and hopefully will tighten real hard. I've been scoping out RE that I'll jump on when cash is king again.

If the boys listed above are correct I'll be sitty pretty.

[turbo6bar]

I think the $300B estimate is awfully low, but it is entirely plausible.

Nevertheless, here's to your sitting pretty, 2.7 guy. :wavy:

[sammyg2]

turbo6bar, yer a dumb redneck. Hay, you asked me to do it

[turbo6bar]

If I have to throw my can of Skoal, I will become irate. Don't go there, boy

[RoninLB]

oh yeah, on the opening article.

I think his perception is completely off the wall.

[tabs]

I keep hearing 2 things over and over again...

1. This time its different

2. The sky is falling

The problem with Retards is that one can say the same thing over and over again and the Retard still doesn't get it.

Every Asset Class has its time in the sun, and has a Business cycle.

Stocks from 1994 through 2000 was where the action was, Housing or RE was DEAD DEAD DEAD, Bonds and interest rates were declining...until 1998 when the Fed started to increase the Short Term Rate. Then in 2001 RE started to do well as Stocks tanked.

So where are we today in the scheme of things...U wana go out and buy RE now to make Money....I DON"T THINK SO...How bout Bonds? Interest rates have increased and BOnd prices have declined somewhat. Yet that Market is pretty much had its run...so where is the MOney to be made on Bonds? So what Asset Class is

has been in the doldrums and STILL not made its run....Lets just say ONE MORE TIME, Companies ONLY buy back their Stock when they consider it to be CHEAP.


One little hint....What is the LIQUIDTION value on Microsoft Stock? Bet its around $42 a share what is Microsoft Trading at $29...Hmmm that means Microsoft is $13 a share under Book value of its shares...looks like some easy money to be made there huh...

[turbo6bar]

MSFT is currently at 8.90 price/book. What am I missing? Certainly sitting in mounds of cash, though.

tabs, do you only go long? Never short?

I am still gunshy with equities. I am only in with retirement accounts.

RE has generated a ton of returns for me, so why not stick with what I know? I do admit my current holdings may fall in value, but with capitalization rates at 8-9% now, I am still beating bonds really well. Foreclosures are already undercutting retail prices by 10-15% now in Tennessee. If banks get desperate, and I can get another 15-20% off (back to 2000 prices), I will see cap rates exceeding 12. I need the cash flow now so I don't have to go work for a living.