Tag Archives: accounting fraud


First out this morning (Tuesday) was this:   “Oil crash may whack earnings of top U.S. homebuilders in Texas”  (Article Link).  Well that’s obvious.  I wrote a post a few weeks ago in which I surmised that the crashing price of oil was likely the U.S. economy’s “black swan.”   Sorry, it doesn’t take Einstein to figure that out.  In my year-end investor letter I stated that the housing markets in States like Texas and Colorado were going to get hammered hard.  I’m already seeing high-end housing inventory all around Denver pile up like litter in a junkyard.

THEN, KB Home (KBH) reported its fourth quarter (fiscal) ending November:

  • *KBH SEES 1Q BOTTOM LINE ABOUT BREAK-EVEN (against expectations of a 17c rise!)

Hmmm…the stock was annihilated today, down 16.3%.  But guess what?  45% of KBH’s sales revenue is derived from the West Coast – primarily California.  Yes, the Company reported “impressive” year over year revenue and backlog gains, but guess what?  That’s rear view mirror stuff.  You can completely ignore its reported GAAP net income number because 90% of it was from a NON-CASH massive income tax benefit it accrued into earnings.

KBH is a viper’s nest of accounting gimmicks and questionable use of capitalized interest, which also serves to inflate its GAAP earnings.  Oh, by the way, did anyone notice that KBH’s Q4 cancellation rate was 37%?   That means you can slash their new order and backlog report by at least 37%.

KBH’s debt/equity is 167%.  Once KBH is forced to start writing down the value of massively bloated inventory, it’s book equity to hit zero or go negative.   It’s inventory value is more than 200% of its book equity.  This stock is going to hit the wall eventually.

You can ignore reality but you can’t ignore the consequences of reality (Ayn Rand).  The reality is that my assessment of the housing market is correct.

Housing Permits, Starts Tank – SoCal November Home Sales Plunge

Closing market update:   Homebuilders were down 1-2% across the board.  HOV was down over 6%.  The company in my latest report was down over 2%.   Anyone who bought my report when it was first posted is now up almost 10%.  Shorting just 100 shares would have paid for the cost of my report my more than 2x.  I think there’s still another 8-10% of downside before any bounce…

Let’s start with real market data before we tackle and Un-Spin the Census Bureau vomit. Home sales in Southern California dropped to their lowest level in 7 years for the month of November.   They plunged 19% from October to November. Since 1988, the average decline from Oct to Nov is 8%.  This is actual transaction data and not estimated, adjusted and annualized drool coming from the Government or a real estate pimp organization like the NAR.  Here’s the LINK.

As for today’s housing starts/permits data for November from the Census Bureau.  The highly polished headlines reported that housing starts were down only 1.2% from October, with permits down 5.2%.  HOWEVER, please note that this is “seasonally adjusted and annualized” rates.  We have no idea what kind of absurdities are built into the “seasonal adjustments.”

BUT, if you look at the unadjusted data for November 2014 vs. November 2013, you find that actual starts dropped 7.5% and permits were down 5.5%.   This is the cleanest way to look at the numbers because it eliminates Census Bureau statistical manipulation and it is is not an annualized rate.  Note:  to the extent there’s errors in the “seasonal adjustments,” annualizing the number compounds that error by a factor of 12.  Here’s the data link from the Census Bureau if you want to see what I’m looking at:  LINK

The homebuilder stocks are going lower.  You can ignore reality, but you can’t ignore the consequences of reality. Despite 30-yr mortgage rates below 4% and a slight easing of FNM/FRE credit standards, mortgage purchase applications and sales are dropping.  Here is the link to my latest homebuilder short-sell report:  This stock is already down over 8% since I first published the short-sell recommendation on December 4th.  It’s going lower.  I would short the bonds too if you can locate a borrow.


Don’t take it from me, here’s some actual market data from around the country (sourced from The Housing Bubble Blog):

Orlando:    Orlando-area home sales have slowed, the inventory of house listings is up, houses are taking longer to sell and sellers have less negotiating power than they did a year ago, according to a report.

Boston:   Everyone knows that the Luxury Glutpocalypse has hit Greater Boston: too many new higher-end apartments, too few tenants for them, and a lot of gobsmacking incentives to try and right the market ship. You can see that the decreases have been steepest in areas that have seen some of the briskest development of luxury apartments (Back Bay, downtown Boston, Chinatown).

Minneapolis/St. Paul:   A sluggish November for home sales and stagnant fall inventory has given buyers the upper hand in the Twin Cities housing market. ‘There’s kind of a hangover of inventory from the fall that isn’t selling.

Housing market guru, Robert Shiller:   “Historically, houses have not done well as investments. They haven’t really gone up much in value in the last 100 years. And on top of that, they’re a nuisance,’ he said. ‘You have to take care of them.”

The zero-interest policy of the U.S. Government/Fed has caused a massive misallocation of capital into a massive oversupply of rental buildings (I see this all over Denver) and single-family homes.  All of the homebuilders for which I have published research reports have loaded up their inventory with spec homes and have used mostly debt to finance the binge.

The next event will a massive “purge.”  Take advantage of the purge by shorting these homebuilders before every hedge fund out there looking for positive short-side alpha jumps on this trade.  You can access all my homebuilder short reports here:   Short The Homebuilders.

This is a volatile sector but there’s a lot money that can be made with prudent capital management and use of calls and puts to help manage the volatility.  All of my reports have a section which discusses both capital management/trading and options strategies.

Case-Shiller: Home Prices Decline For The Third Month In A Row

“The broad-based deceleration in home prices continued in the most recent data,”  says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices

The housing market was greeted with a double-whammy so far this week.  Yesterday’s Pending Home Sales Index for August showed a monthly and year over year decline in the number of home purchase contracts signed last month. Today the Case-Shiller home price index registered its 3rd monthly decline.

Perhaps most notably was the fact that the home price decline for San Francisco was the biggest factor in the decline of the C-S index.  This graph prepared by Zerohedge shows the significance of San Francisco home prices as leading indicator for the coming onset of financial and economic turmoil (click on graph to enlarge):


Perhaps just as telling is the fact that the Dow Jones Home Construction is once again down over 1% today, despite the fact that the Dow and the S&P 500 are green.   Think about the implications reflected by this.  If housing stocks can’t rally with the general stock market – especially when the Fed’s obvious hand of intervention is at work – what will happen to the homebuilder stocks when the intervention fails and the general stock market turns inexorably lower?

I posted a new housing stock short-sell report last night.  Given the enormous amount of debt this company has taken on in relation to the number of homes it’s selling, I believe this company’s financials are going to deteriorate quickly as the housing market crumbles.  The situation is compounded by the company’s use of sleazy accounting, which I detail in the report.   You can access this report here:   Homebuilder Research Reports.

I am projecting a base-case 70% ROR with this trade over the next 18-24 months.

Spot The Problem? Hint: High Homebuilder Confidence Marks The Top

Although I never put much credibility in the Government’s housing starts report because the data collection is poor and the data that is collected is put through the Government’s statistics manipulation meat-grinder, today showed a stunning decline in housing starts vs. last month and vs. expectations.  The high volatility last month and this month was due to “reported” starts in apartment buildings.  The last time apartment starts reached a very high level was in 2005 – right before the housing bubble burst.

And yesterday much ado was made about the National Association of Homebuilders Confidence Index report.  It’s reached a level not seen since, well – 2005.  I put together this graphic below which happens to show what happens to housing starts and new home sales when homebuilder “confidence” spikes up like it showed in yesterday’s report (click on graph to enlarge):


As you can see, the last several times builder confidence spiked up, housing starts and new home sales fell off a cliff (2005, 1994 and 1990).  I remember the 1990’s housing market well because I was trading homebuilder junk bonds on Wall Street.  All of them were the junk bonds of the same homebuilders around today who nearly went bust in the late 1980’s and in 2008.

The fact of the matter is, the homebuilders had damn well better be confident because every single one of them is taking down piles of debt in order to build up their inventories to levels last seen in 2005.  Everyone I look at is doing this.  What’s completely startling about this is that, while homebuilder company debt levels and inventories are back to their 2005 levels, the overall sales volume for new home sales is ONE-THIRD the level being sold in 2005.

Hopefully you can see where this is headed because, right now, the homebuilder stocks are THE best short-sell opportunity in the entire market since the opportunity to short homebuilder in stocks in 2005 and tech stocks in early 2000.   Stunningly, the p/e ratios at all of these homebuilders are well in excess – as in multiples – of their long run average p/e’s and their p/e’s at the peak in 2005.

Here’s some facts about the ability of the average American to actually buy a home – this comes from John Williams’ Shadowstats.com, who sourced this information directly from a Government report:   1)  U.S. Economy Re-Entered Recession in 2013, Indicated by the BLS’s Annual Consumer Expenditure Survey;  2)  2013 Total Money Income Fell Even Before Inflation Adjustment.   If people are not earning money, they aren’t spending money.  If they aren’t spending money, they sure ain’t buyin’ homes.   That latter fact is confirmed by this year’s collapse in mortgage purchase applications.

There is a unique opportunity to make a lot of money shorting homebuilder stocks – either outright or via options strategies.  I have three reports which outline how to do this and why these companies are great short candidates here:   Homebuilder Research Reports.

Big institutions with big homebuilder stock positions (Vanguard, Black Rock, Putnam, Fidelity) have not begun to sell yet.  You want to be positioned ahead of their selling when the zombie spreadsheet jockeys at these firms figure out what’s really going on…

Derivatives Meltdown Part 2 + Let’s See How Obama/Kerry Respond To This…

[Update on MH17]:  It’s starting to not look so good for the Ladies who doth protest too much (Obama/Kerry/Biden/Feinstein/McCain/etc).  Russia has satellite images showing Ukrainian troops deploying the type of missile involved and wonders why the U.S. won’t release satellite photos from a U.S. satellite that was directly overhead at the time, among other questions raised by Russia:   10 Questions From Russia For Obama

Oops – Obama pisses off China on MH17 now: China Condems Obama’s Response to MH17. That’s not good, given that China is America’s largest lender and enables the hoi polloi here to borrow and spend…

If you’re bored by the that topic already, then maybe Part 2 of our derivatives Armageddon series will interest you.  In this video we discuss some of the insanity that lies behind U.S. derivatives accounting rules and how they favor the banks at our expense:

The coming derivatives collapse is one of the primary reasons the price of gold (and silver) is going to the moon. Gold will start moving well in advance of this event but it will go parabolic once it becomes obvious to everyone.

Assuming the markets remain functional in the aftermath, the junior mining stocks will move even more than gold/silver.