The Financial Analysis Guy

On Wednesday, Home Builders Research President Dennis Smith gave his annual presentation on the “state of the Las Vegas housing market” to hundreds of Las Vegas real estate professionals.  I was not able to attend this year, but I did speak with several folks that were able to attend. 

Our leading housing prognosticator here in town made some good comments and some not so good.  Again, many look to this guy to give them guidance as to how to “feel” about the coming months.  Dennis pointed out that new-home sales in Las Vegas are down 49 percent for the first two months of the year, existing-home sales are off 37 percent and home building permits have plunged 70 percent

He said, “Obviously we’ve got tight credit and qualifying requirements.  Those are factors, too. I could go on and on. I think we’re close to the bottom, but it’s going to be an extended bottom.”

Any recovery won’t be in the shape of a “V” but a flat-bottom “U,” Smith told about 700 builders, developers, mortgage brokers and real estate agents at the Las Vegas Convention Center.

He predicted that median new-home prices will finish the year at $274,000, about $1,000 more than February’s median, though it will dip further between now and then. He thinks 2009 will show a 2.2 percent increase to $280,000 and 2010 will be about the same, with prices conservatively climbing to $286,000.

“We had many years of 1.5 percent to 2 percent increases and that’s what we’re going back to,” Smith said.  Resale prices, which are down 5.2 percent so far this year, will rise again by about 1.3 percent in 2009 to $240,000, he predicted.

This information is fine, but if you are working in this market, you simply want to hear something different.  We have all been wallowing in this purgatory for quite some time now and we want to believe something different.  I take a different viewpoint than from what Dennis and others who are way too negative at the moment. 

NO ONE and I do mean absolutely nobody predicted in 2003 that we would get to 38,000 new housing units in 2005 and 2006.  Nobody could foresee such a run-up and bubble like what we saw in those years.  Why would we simply blindly buy into this near doomsday scenario for new home-builders. 

Look, there are TONS of new jobs coming in the coming year or so.  Interest rates will end up falling SHARPLY very soon due to the Uncle Ben and Fed’s action on the Fed Target Rate.  There are still 6000 folks moving in every month. 

Please folks, try to stay positive and look at the physicals.  It is very easy to see where we are today and predict that more of the same is coming.  It is very difficult to take the position of change.  Therefore, many in the business take this position like Dennis has taken. 

The following information came from that presentation and was published in the local newspaper as well.  This is just for historical perspective, but please see where the bubble occurred and where we are today.  If you were put this on a chart, you will see where we have to go to make up for the false demand in those high-tide years. 

I love watching CNBC in the morning before I head to work.  I think it is great to see all the talking heads (also another FANTASTIC band) not only think they know what to do and what is going to happen next, but even more ridiculous, try to convince you the watcher that they are right.

I am all for good journalism and want to hear the facts, but these folks oftentimes miss the mark.  I love CNBC, but if you are looking for great financial analysis and clean reporting of the news, take Bloomberg television for a spin.

Now to the point, I was watching a very nice, VERY good looking young lady who was guest anchoring for the day on The Call for my man Dylan Ratigan who said something that really wet the whistle and made my morning.  She said something like the following to one of her guests,

“I know we have seen a huge run-up in commodity prices recently and over the last year, but don’t we have to look at commodities in a totally different light.  I mean, you simply can’t look at them like you used to and really, everything has changed.”

AND, get this, her guest host has the cojones (Spanish…look it up) to claim the unthinkable, “Yes, you are right.  We have a new paradigm to view these and there is no end in sight to where the prices could go.  The global demand story is real and it is here to stay.  Demand is driving commodities like never before.”

I really do think we need rewind buttons in life.  She could not be serious and I am writing this off as a hoax.  As the Financial Analysis Guy, I am now hereby pronouncing this as one of the top 5 dumbest things said on financial television. 

In the spirit of simplifying things as much as possible when it comes to analysis, let’s follow the physicals.  Has the global population doubled in the last year?  Have we reduced crop output by 50% yield in the last year?  Have the number of people eating corn, wheat, soybeans, etc doubled (and in some cases tripled in the last year)?  The answer to all of these are of course no.  True, demand has increased while supply has dropped, but not to the extent we have seen in pricing.

The last time I heard this statement was when I entered the Las Vegas Real Estate market in 2005.  “It is different this time,” they said.  “The supply and demand curve has changed forever with a new paradigm.”  I also heard this very same statement in 2000 and 2001 about technology.  We all know how both of those ended.

I have been through a number of cycles in my lifetime and a number of bubbles.  The commodities markets, and there are 14 of them that trade, are not in a 2000-2001 “tech-like” bubble.  They are, however, way overvalued.  Don’t look any further than the 12 month chart on GLD (the common Gold ETF) to see unsustaining gains. 

As the great Guy Adami states on Fast Money, Gold takes the stairs up and the elevator down.  Which means, you better be tracking it very closely to see when the traders start dumping their long positions.  When they all head for the exits at the same time, is when you see HUGE declines.  Track the other commodities against gold and you will see similar movements over the last 12 months.  100-300% gains are not sustainable - regardless of what beer goggles you are wearing when talking about them. 

Never, and I mean NEVER, think that the old way of looking at financial analysis has changed drastically with a new “paradigm”.  It never happens that way - it takes years, sometimes decades for things like that to shift, not months.  The law of “reversion to the mean” is not a theory.  It is a law.  Expect to see annual gains of 12-15% in anything that is tied to sound financial analysis - and that is only for the very best financial vehicles.  Just ask the smartest man in any room, Warren Buffett, what he thinks about the type of gains seen in commodities. 

Unsustainable, and please, if you have seen large gains in your portfolio due to a commodity position, be reasonable so as not to get caught looking for the exit the same time as everyone else.  Take some profits and come to Vegas to buy me a Guinnness at the world famous English pub, The Crown And Anchor…one of the very best pubs in Vegas, but that is for another time.