Yesterday, we picked up Dan Gross’ challenge as to what other sectors the Housing slowdown was making its impact felt.
Our experiment in “Crowd-Sourcing” worked out well – you contributed scores of suggestions based on observed data, both public and private.
Here’s a list of your observed sector impacts as they relate to the Housing slowdown:
RV Sales: a lot of the people who were buying $100,000 RV’s were taking the money out of their house to do it. No longer
Thoroughbred horse auctions: have seen their gross and median prices decline in California, Maryland, Florida and Kentucky.
Convention Centers: As RV and Boat sales slow, the RE industry, the construction suppliers, and boating mfrs will have less need for the big convention spaces.Lawnmower mfrs: Toro said its Q1 sales
rose 29%, while Briggs & Stratton said the drop in sales was mainly
due to lower sales volumes of lawn and garden equipment and portable
generators, and lower unit shipments of engines. One explanation: As
homeowners get hit with ARM resets, they are dropping that lawn service
and doing it them selves.
Outdoor Power Equipment and the small-engine manufacturers: They are paradoxically doing fine, but probably for the same reasons.Contractors: tradesman are much more available now, as they have experienced a slowdown in both construction AND remodeling projects.
Condo/Homeowners’ Associations: Many condo owners could face special assessments, as some owners to walk away from loans they can’t afford. That presents a problem for deferred maintenance issues and unfunded reserves.
Furniture companies: all hurting. STLY, HOFT, FBN, ETH. They are getting the double whammy…lower sales and they can’t compete with overseas companies. (ETH did just say yesterday that they see signs of the consumer making a comeback)
State property and sales tax receipts: They are reported down in many states even as government stats say sales are strong. (I’m sure many states are now looking at the decrease in remittances to Mexico and Central America and adding up the taxes they SHOULD have collected from homebuilding labor). Property taxes keep rising nearly everywhere, even as house prices are falling Despite the housing downturn, the market value of millions of homes still exceeds their assessed value. According to the USA Today, all but five states limit how quickly property taxes can rise.
Building Materials: Lumber Wood Production, Bldg Materials Wholesale, Home Improvement Stores, Select metals (copper, aluminum)
Airlines: Over the past week, Southwest Air, JetBlue, Continental and UAL all said domestic bookings were weak. Expect this to eventually work its way to Travel related industries, like Cruise liners, rental cars, regional and domestic focused airlines, etc.
Auto Suppliers: Watch companies like Graco (GGG) – they missed expectations, but, more importantly, the composition of earnings gave a clear indication how weak the housing-led decline is domestically and, by contrast, how strong the international end markets are. Graco’s manufactures equipment to apply paint and other coatings on automobiles, appliances, furniture, etc. The company recorded its first profit decline in six years. North American volumes dropped by 9%, while international sales grew by 23%.
Construction Equipment: Komatsu and Kubota’s N. American equipment businesses are doing poorly thanks to lower housing construction.
Truckers: like RRs, are having a rough YoY time in volume terms: www.truckline.com Railroad volume is anemic YoY (see: www.aar.org) for container boxes shipped from Asia (15% of which is furniture) as well as for materials (wood for housing, etc)
Autos: Camry sales ex-hybrid Camry are actually down. SUV sales are flat to down except for the redesigned Rav4, and that is due to a redesign. Tundra sales were good. In short, the equivalent of same-store sales for Toyota was flat to down. Also, AutoNation’s CEO Sees Soft Car Market Ahead Considering how many car loans were refinanced into homes and paucity of customers paying for cars with cash, it is ridiculous to assert that the LTV of individual consumers has no impact on car sales. When I was selling, I saw it all the time. There are only so many times you can rollover an upside down person before it becomes impossible. (This would explain Harley’s (HOG)
poor earningsinventory build).
Thanks to everyone who participated in this crowd sourcing experiment!
(All yours, Dan)
Barry,
The latest news about Harley Davidson’s earnings on MarketWatch are as of 4/19. Was this adjusted somehow? Even the chart looks good (tho slightly down for the day)…
Harley-Davidson gets lift from first-quarter earnings report
(11:39 AM ET) NEW YORK (MarketWatch) — Shares of Harley-Davidson Inc. (HOG : Harley-Davidson, Inc
News , chart , profile , more
Last: 64.74-0.81-1.24%
12:15pm 04/26/2007
HOG64.74, -0.81, -1.2%) rose 4.3% to $63.92 on Thursday after the Milwaukee-based motorcycle maker posted first-quarter earnings of $192.3 million, or 74 cents a share, on revenue of $1.18 billion. The company said the latest results reflect the impact of a three-week strike during the quarter at its manufacturing plant in York, Pa. In the same period a year earlier, Harley-Davidson earned $234.6 million, or 86 cents a share, on revenue of $1.29 billion. The average estimate of analysts polled by Thomson Financial was for a profit of 72 cents a share in the March period. Looking ahead, the company said it expects earnings per share growth of 4% to 6% in 2007 and 11% to 17% in 2008. It anticipates shipping between 94,000 and 97,000 Harley-Davidson motorcycles in the second quarter.
Barry, I’m not sure about your correction on Camrys. I think it makes more sense to think of the hybrid version as same car, different features, so we’d have to mark the Camry sales up.
That said, You’d also want to look at the sector as a whole, not just a producer that’s rising in market share.
Isn’t it a surprise that the economy is “holding up” despite the extremely poor performance in housing?
Wouldn’t one have expected the economy to be doing a lot worse given how housing is at this very moment?
These are thoughts that always cross my mind everytime I read about housing and what it means for the market & economy. At some point, one has to ask oneself, “is the market more wrong? or am I more wrong?”
Re: hog, could be global sales are picking up. I’d like to see asia v. n america. I also wonder about the golfing industry. Callaway is doing fine, but I’d bet overseas growth is the driver (no pun intended).
Is the market wrong? You mean, for instance, how smart it would have been yesterday to short the hommies, seeing how there is no end in sight. All of which are up 3-5% today.
Or short BZH, who said that they can’t even predict what their earnings will be, the market sucks so bad.
Yet BZH is up over 4% today….LOL.
Michael C.:
Where you’re wrong is in expecting instant gratification.
We’re not talking about a hydrogen bomb here.
Here is a Bear case for HOG:
http://transport.seekingalpha.com/article/31861
LAWMAN – I don’t think it’s usually very prudent to open a short when bad news is already on the front pages of the MSM. How much profit would be left?
That said, many housing stats are now hitting 20 year records for the worse. But at the same time, the economy continues along at 1-2% with equities hitting new highs.
So…what is the Big Picture?
Michael C.:
Where you’re wrong is in expecting instant gratification.
We’re not talking about a hydrogen bomb here.
To say that “we’re not talking about a hydrogen bomb”, I assume that you mean that the process takes time. So, then you are saying it is a matter of timing. However, one cannot continually say that without eventually questioning whether the timing itself could be wrong.
It isn’t that I am expecting instant gratification. It is rather that the gratification I was expecting from this type of data at this point in time has not come to fruition.
In other words, if 2 years ago you had expected existing home sales to hit a 20 year low, where would you have expected the market and economy to be? And if it weren’t, what would that mean?
How would you have answered those questions then?
D. I see the bear picture now, for HOG, after carefully reading the article. I was somewhat surprised myself at my findings, as I expected the ‘man-toy’ segment to be the first to be hit hard. It seems HOG has put a ‘spin’ on the inventory to meet 1st Qtr expectations of shareholders. As the author points out,
“But as the adage goes, all such acts must come to an end. ”
I think this is the critical issue which must get worse for the homebuilders to be a good short at their current valuations.
NEW YORK, April 26 (Reuters) – U.S. home builders’ meager
cash flows may pose a threat to their credit ratings, Moody’s
Investors Service said on Thursday.
Less than half of Moody’s rated home builders posted
positive cash flows for the year through the end of 2006, which
is likely to make it difficult for them to comply with
indenture covenants, the credit agency said in a report.
This “underscores a potentially serious problem and signals
that their current ratings may be too high,” said Moody’s Vice
President Joseph Snider.
Due to the falling dollar, globalization, and free trade agreements there are many more companies who can sustain profits even when the U.S. economy falls; however, there is one group that is dependent upon U.S. success and that is the banking industry. It takes a long time for the effects of the housing slowdown to work its way through into the financing institutions themselves, but there is an early warning sign when more and more of these institutions have to capitalize negative amortizations while real interest income declines in order to show positive results.
It is when the implosion from the ARM resets occurs and causes havoc in the financial community that the game will be afoot.
CEOs, analysts, and market pundits are all paid to paint a rosey picture and keep the shipt afoat and the stock prices high – analysts were still touting Enron almost to the very end.
GAAP and fancy footwork can keep the game going only so long before reality sets in.
The Golf Industry – completely different animal. It’s been in a slump for about 4/5 years, basically there was a Tiger “boom” in the 90s that started to evaporate around 2002-2003. Every year since then the number of rounds in this country has steadily declined, and reportedly last year was the first when more courses closed than opened. The manufacturers have adjusted to this over time and most seem to be doing just fine, focusing on selling newer technology to the existing base of golfers.
Haven’t seen anything tied to real estate, but since its already been in a five year gradual decline, it would take a severe decline to come up with any real estate connection. And antecdotally, here in the DC area, the population growth vs lack of new courses means the courses are full every weekend I play, with generally higher greens fees. Disclaimer: I am heavily invested in an 8 handicap.
But back to the big picture, even if all this real estate related damage is going on, if RE is about 6% of the economy and is sick, it still isn’t going to do much more than it has already. Goodness knows manufacturing has been sick ever since Clinton flung the doors open to China (I loved the comment “Every day millions upon millions of people thank Bill Clinton for their manufacturing jobs – unfortunately, they are all Chinese”) and that effect has been almost completely nonexistent over many years. I don’t much care for either one and think we would all have been better off without both, but economies adapt and move on. We are set up to suffer a recession if some other trigger kicks in, but otherwise I suspect we will continue to draft along as the last car in the global economic race. A sad comedown from previous decades but since its not a political issue (bet it never shows up in the upcoming campaign), no one really seems to care. Curious that everyone cares about losing a little military war in Iraq and no one says a word about getting crushed in the huge global economic battle.
Lewis
Lewis,
I think the point you miss is that this has really been a credit/lendidng bubble, with RE valuations simply the outward aspect of it. The real fun starts, as Mr. Munn said above, when the financial institutions can no longer hide their oceans of red ink with their asanine accounting procedures.
Winston & John say – however, there is one group that is dependent upon U.S. success and that is the banking industry
I say – the banks will survive, the money industry is a monopoly
the one group that is dependent upon U.S. success – are common US citizens, who have their houses up on the block as collateral
grag,
The banks will go running to the government for a taxpayer-financed bailout which the pols will probably want to give them.
So write your congresscritter: no bailouts for bonehead bankers!
Barry,
I think u left out what may feel the biggest impact of all; The currency markets.
Growth abroad => higher rates
Slow down here => lower rates
In the auto sector, heavy truck suppliers are being hit with the double whammy of weak trucking industry performance and the hangover from last year’s pre-buy ahead of the 2007 emissions rules.
Caterpillar saw YoY heavy truck engine sales fall 53% in 1st quarter ’07.
DaimlerChrysler has announced possible layoffs of 3200 employees in its heavy truck business.
etc.
Barry, from yesterdays post on crowdsourcing, you said this:
“Recreational Boating: West Marine’s quarter showed sales were down 4%. Marine Max cut forward guidance and earnings estimates for 2007 by over 60%. Marine Max also happens to Brunswick’s largest customer — and they report tomorrow (4/26).”
Well…am I glad I didn’t short Brunswick! Profit at Brunswick dropped 32%, but shares are up 10% today!!
It feels to me that intelligent fundamental analysis is just NOT helping trading in this market! I think you need to study the psychology of it at the moment, perhaps because short interest is relatively high in many areas of the market.
Re: golf, I’d suspect there’s a lot of churn in consumers since the game is so darn frustrating (you just whack the little ball into the hole, right? easy!). Manufacturers would presumably expect this, but might overlook the fact that borrowed money pays for their goods. A person trying to keep up with a loan payment doesn’t buy this year’s latest gear.
In terms of the more direct real estate connection, there are a lot of wonderful gated golf developments built recently with a glut of empty houses and lots awaiting buyers. And a lot of empty golf courses.
Money Supply:
This is very off topic. Can someone be so kind as to explain why money supply would be skyrocketing? I thought they were inversely correlated to interest rates, however if you look at even M1 (not going into the stealth M3) its exploding. Larry Kudlow brought that chart up on his show and it tracks almost exactly to the SPY. Dropped in July and then exploded. Is this a sign of them inflating the economy in the background or is there something more normal at work here?
Thank you for anybody willing to address it.
William:
Money growth is a direct residual effect on the Federal Reserve caused by the discrepacies among three main items: the federal debt requirements for the current year, the sales of treasury bonds, and the difference between those two.
For example, if the current month’s need is for $40B and the treasury sales only produce $35B, then the Federal Reserve is required to monetize the difference, or create $5B in new currency out of thin air.
One thing that may be contributing behind the scenes to the increase in money supply is a slight decrease in purchases of treasuries by Foreign Central Banks – China said in March they would do this and so far it looks as though they are keeping their word.
The Federal Reserve only has two choices it can make; it can target a money supply growth, but that leaves interest rates dependent on the fluctuations in the marketplace; or, they can target an interest rate, which means they cannot directly control the money supply.
What you see in the money supply is not Fed pumping per se – it is an inability to pass on the U.S. debt via treasury bonds.
You may find the discussion at: http://www.minyanville.com/articles/Fed-Interest+Rates-Funds-Economy/index/a/12489
to be of value.
Also,this article: http://www.mises.org/story/2462 is worth the read to grasp the choices the central banks have as to target interest rates or money supply and the effect of those choices.
I find it a little unnerving that the current position of the Fed is the same “target interest rate, ignore money supply” formula in effect by the Fed at the time leading up to 1929, the stock market crash, and the Great Depression.
As Mark Twain said, “History does not repeat; but it rhymes.”
REUTERS US homebuilder cash flows a ratings threat-Moody’s [GXNGDBF]
By Neil Shah
NEW YORK, April 26 (Reuters) – U.S. home builders’ meager cash flows may pose a threat to their credit ratings, Moody’s Investors Service said on Thursday.
Less than half of Moody’s rated home builders posted positive cash flows for the year through the end of 2006, which is likely to make it difficult for them to comply with indenture covenants, the credit agency said in a report.
This “underscores a potentially serious problem and signals that their current ratings may be too high,” said Moody’s Vice President Joseph Snider.
Winston,
How long was the Fed doing that before the ’29 crash? I’m not looking for a repeat, just trying to get a feel for the rhyme and meter.
Barringo,
Sometimes I begin to doubt you… and then you pull out some pure and sublime unadulterated observation of true intellectual supremacy and profound analytical crystalline essence (like this little macro experimentational extravaganza), and I tend to forgive the little cat-play with Luskin in Kudlowvia — where he and Kudlow played with you like a cat playin’ with a near-dead half-chewed chipmunk -– and I recover my respect for your curmudgeonly self.
John:
I don’t have an exact date other than the “early 1920’s” – the time the Federal Reserve adopted economist Irving Fisher’s concept of using the consumer price index as a guide for monetary policy.
I also found this another interesting quote from 2001 from Roger Garrison at: http://www.auburn.edu/~garriro/cycle.htm
“Our suspicions of political motivation–along with the 13 percent MZM growth–suggest that the managed rates (of interest and unemployment) are somewhere below the respective natural rates. If so, the resulting pattern of investments is unsustainable; the economy is living on borrowed time. It’s a familiar story. The internet and MZM notwithstanding, business cycles are what they used to be: The central bank has whipsawed the economy once again.”
What rhymes with recession?
There is another field that I see slowing significantly. Niche Software services the business I am in. I do niche work in the software mostly for manufacturing companies. I implement supply chain ERP apps for a lot of my clients.Starting late last year things have gotten so bad I will have to let go of folks. Clients arent willing to start anything new for the foreseeable future. It took so much work to build this now I have to dismantle it. First offshoring threat and now the slowdown with more offshoring threat. I have no idea what the bozos who r running the show are upto. America is no longer the place to start anything other than a food business. Everyone has got to eat fast food I guess. Just hate this game I am at a disadvantage no matter what nothing is in my favor. Apologize for the procrastination.
I feel your pain Max. The food business isn’t all that great either, unless your McDonalds. I would say AMerica is no longer the place to start anything other than a porn business. We are number one in that.
Munn,
“It is when the implosion from the ARM resets occurs and causes havoc in the financial community that the game will be afoot.”
So your argument is that when the rate of consumer failure on ARMs hits a key point, then the banking industry really gets roped? I guess I don’t see it. For one, the ARMS have already been resetting in droves, and there is a huge growth in foreclosures, however even at current foreclosure rates this is a drop in the bucket to most of financial industry.
Now, the argument that the lenders are surviving on the investments of our foriegn friends is surely a more powerful one, but your comment did not lead me to believe this is what you were arguing. If rates begin to skyrocket due to more stingy foriegn investment, then I would be more inclined to follow this theory of the big threat of ARM resets.
Opening Bell: 5.2.07
Dow Jones Holders Say Murdoch Bid May Trigger Auction (Bloomberg) Last night, after word came out that the majority of the Bancroft family’s shares were opposed to the merger, something a little surprising happened, the market didn’t seem to believe…
The Real Estate Ripple Effect
The Real Estate Ripple Effect