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“The Housing Industry Is In A Free Fall”
The following analysis was presented earlier this month in the Short Seller’s Journal.
I agree with the title quote but it’s not mine. The CEO of luxury furniture retailer, Restoration Hardware ($RH), commented on the Company’s Q3 earnings call: “For the housing point of view, there is no soft landing…It’s looking more like a crash landing in the housing market. It’s looking like 2008, 2009…The housing industry is in a free fall.” Furniture sales are highly correlated with the home sales. I was pleasantly surprised thus to hear the CEO of a company tied at the hip with the housing market speak candidly. This is in contrast to the CEO of every homebuilding company who put a positive spin on the prospects for their respective companies’ home sales in the outlook for 2023 in their companies’ latest quarterly earnings report.
In a sign that investors are fleeing from real estate investments, the largest real estate fund operator, Blackstone, restricted investor redemptions from its flagship private REIT. Shortly after this, Starwood limited withdrawals from its private REIT, which is the second largest non-traded REIT. Private REITs are funds for wealthy individuals and money managers (pensions, insurance companies, hedge funds etc). This is a sign of the degree to which the real estate – both commercial and residential – has become illiquid.
This means these residential REITs have run out of cash and are stuck with homes that would be difficult to sell quickly enough to meet redemption requests. This is very bad news for the inventors in these REITS, many of them pension and retirement funds. In all likelihood the next directional move in real estate will be a big, step-function move lower. (Note: between private equity and real estate, pension funds will eventually be forced to take rather large market-to-market valuation write-downs).
According to Redfin, 60,000 purchase contracts were canceled in October. That’s the highest monthly number since Redfin began tracking the data in 2013. The number of price cuts in October also hit a record high in October. Not all of the 60,000 cancellations were on new homes, but canceled purchase agreements on new homes become spec home inventory for the homebuilder.
Even worse, the cancellation rates for homebuilders seem to have accelerated during the fourth quarter compared to the third quarters, as I discuss below with TOL and HOV quarterly numbers for their FY quarter ended 10/31. As an example, TOL’s cancellation rate jumped to over 20% from 13% in the previous quarter.
With cancellation rates rising quickly and large pools of capital dedicated to buying and owning rental portfolios out of cash, prices are going to have to fall by what will eventually be a shocking percentage in order to balance out supply and demand. And this is before the next shoe drops, which will entail a surge in forced selling by individual investors (e.g. ABNB rental investors). This growing amount of unsold inventory on homebuilder balance sheets will soon become a nightmare for these companies and their shareholders.
In fact, for Lennar (LEN) it already is a nightmare. LEN announced that it is offering to sell around 5,000 homes in inventory in “block trades” to rental landlords, with an opportunity to acquire entire subdivisions. Most of these homes are available because of contract cancellations. However, it also suggests that LEN has some subdivisions in which most to all of the homes have not been sold. This will be interesting to watch as it would appear that many of the residential REITs with big rental portfolios and who might otherwise bid on these home packages have run out of cash.
Lennar announced its Q4 (FY Q4 ended 10/31) results on December 14th (Wednesday) after the close. I’m just going to review the key metrics from Q4 that will affect LEN’s financial performance going forward. New orders were down 15% YoY, while new order values were down 24.1% YoY. The decline in the value is attributable to LEN slashing the average selling price (ASP).
The YoY ASP decline at 10% was much steeper than other homebuilders’ FY Q3. Prices were slashed in an effort to move inventory ahead of the bulk sales announcement. I’m not sure they’ll move much unless it’s at fire sale prices. How would you like to be someone who who took delivery of a new home from LEN in Q4 before LEN announced its bulk-sales?
The Q4 new order ASP (contracts signed) was down 10% YoY and was it down 13.8% from the ASP of the homes delivered (as opposed to the ASP of a new order contract) in Q2 and Q3. If you bought a LEN home that was delivered in Q3, you are down 13.3% vs what you paid, on average. The cancellation rate in Q4 jumped to 26% from 21% in Q3 and from 12% in Q4 2021. As with every homebuilder, the cancellation rate at LEN is climbing up to where it was during the worst of the 2008 housing bust. It will be worse this time.
Looking at the p/e ratios of homebuilders is not relevant right now because most of them will likely have earnings that swing to negative in 2023 and/or 2024. At some point the market will price this in regardless of where mortgage rates are at the time. I still expect LEN and the rest of the homebuilders to start selling off sometime this month or in early 2023. Q1 2023 could be bleak given the declining pool of potential home buyers who can afford a home.
TOL and HOV also reported their FY quarterly numbers through October 31st earlier this month. Both had worse new order numbers than LEN. TOL’s new unit orders for Q4 plunged 60% YoY and 50% from FY Q3 2022. This decline from Q3 to Q4 is not necessarily “seasonally” derived, because TOL’s unit orders in Q4 2021 increased 6% from Q3 2021. Similarly, HOV’s FY Q4 new orders during the quarter plunged 49.4%, the unit backlog fell 31.1% and the dollar value of the backlog dropped 20%. But here’s the money-shot: HOV’s cancellation rate was 41% vs 15% YoY.
The contraction in the housing market is just starting to build momentum. Witness the big decline in existing home sales in November – 7.7% from October on a SAAR basis (seasonally adjusted annualize rate) and the 35.4% plunge YoY. This is the 10th consecutive month of declining home sales and the biggest YoY decline autumn 2008. Not including the pandemic lockdown period, the November SAAR for existing home sales is the lowest since 2010. Of particular interest, the $1mm+ segment of the market had the biggest decline in sales (closings), down 41.25% YoY.
It’s not going to get better for the housing market. Despite an 80 basis point decline in 30-yr fixed rate conforming mortgages (20% down, minimum 740 FICO), the mortgage purchase apps index declined 0.1% this past week from the previous week. The not seasonally adjusted index fell 0.3%. Since mortgage rates peaked on October 21st and began to decline, the mortgage purchase app index is down 17.3% and down 36% YoY. The conclusion for me is that the housing market is in free fall.
The Precious Metals Sector May Have Started A Sustainable Bull Cycle
I wrote the following commentary for Kinesis Money. A portion of it was derived from analysis I presented to subscribers of the Mining Stock Journal a couple weeks ago. You can learn more about this newsletter here: MSJ information
It’s likely that the next cyclical, sustainable move higher in the precious metals sector has begun. The silver chart to illustrate why I think this may be the case with gold and silver:
The chart above shows a 5-yr weekly of SLV (representing the silver price). The same charts for GLD and GDX look quite similar to the SLV chart.
After peaking in August 2020 following the post-lockdown bull party in all financial assets triggered by a massive dose of money printing by the Fed and other Central Banks, the precious metals sector has been in a two-plus year consolidation/pullback. That pullback was completed at the end of September and has been followed by sharp rally in gold, silver and the mining stocks.
From a technical standpoint, the precious metals sector looks ready to move considerably higher – note the set-up in the MACD in the above chart. I use the MACDf as a technical tool for multiple-year, weekly charts asit is slower-moving than the RSI and, to some degree of validity, reflects the longer-term potential for a move in the markets.
In the one-year daily chart, silver popped over its 200 dma (red line) on November 10th, which was the last key moving average hurdle on the chart (21, 50, 100, 200 dma’s).
After a brief trip back below the 200 dma, it shot back over the key moving average on Wednesday (November 30th), thereby successfully fending off an attempt to drive the price lower.
From a technical analysis standpoint, an investor who likes to use charts as part of the tool-kit for investing and trading would be hard-pressed to find a more bullish chart set-up than the charts for gold, silver and the mining stocks.
Certainly the technical picture for the precious metals sector is more than supported by several fundamental factors. It’s been well-documented that the banks have been reducing their net short-exposure to gold and silver futures contracts on the COMEX. This move has been mirrored by the BIS, the Central Bank of Central Banks, which has nearly eliminated its gold swap transactions (BIS gold swaps) after the swaps outstanding reached an all-time high in February.
The BIS gold swaps are a gimmick used by the BIS to make available BIS gold bars that can used to “allocate” bars to large buyers who choose to leave their bars in the custodial safe-keeping of London bullion banks.
The problem for the BIS is if the legitimate owners of those bars decide to take possession of the bars and remove them from London bank custodial services. The only reason I can think of that that the BIS would largely eliminate its exposure to upside price risk in gold and silver is concern about the probability of a big move higher in the sector that might trigger a run on bars on London bullion vaults, including the “swapped” BIS bars.
This action by the BIS thus removes the risk of its exposure to unallocated gold bars in London bullion bank custodial vaults, which implies that it be may worried about either a big move higher in gold or a run on the physical bars in the custody of London bullion banks – or both.
In addition, there’s been a low-grade gold and silver “rush” as evidenced by the large-scale removal of physical silver from LBMA custodial vaults in London and the removal of physical gold and silver bars from COMEX custodial vaults in New York. This reflects both a growing imbalance in the “demand” side of the supply/demand equations for gold and silver.
Furthermore, I would make the case that, particularly after the nickel short-squeeze earlier this year, there’s growing distrust by investors of leaving their physical gold and silver bars in custodial vaults. I firmly believe that, when it comes to physical silver, possession is ten-tenths of the law.
Finally, in response to the ongoing global bear market in equities and a growing fear of another credit market crisis, I expect to see movement of investment capital out of financial assets and into the precious metals sector that would entail a move into physical gold and silver followed by a speculative frenzy in mining stocks. Institutional investment portfolios in totality have a tiny percentage of assets allocated to gold and silver (less than 1%). If these funds allocated just 2-3% of their assets to the precious metals sector, it will be accompanied by soaring prices for gold, silver and mining stocks.
Is Investing in Gold Still Profitable?
I wrote the following commentary/analysis for Kinesis Money’s Blog:
With inflation raging and the price of gold seemingly not keeping pace with rising rates, articles suggesting that gold is no longer a valid hedge against inflation or preservation of wealth assets have proliferated in the mainstream financial media.
However, as I’ll show, nothing could be further from the truth. While the price of gold is subject to short-term volatility, an examination of the data over a long period suggests that gold is a perfect ‘hedge’ against inflation.
Inflation and gold
The term “inflation” is commonly used in reference to rising prices as measured by the Consumer Price Index (CPI). However, this is not technically correct. The economic definition of “inflation” is the rate of increase in the money supply in excess of the rate of increase in economic wealth output.
As Milton Friedman famously said, “inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” This aptly describes Central Bank monetary policy in relation to wealth output since Quantitative Easing – aka “money printing” – commenced in late 2008.
Price inflation is thus caused by inflation of the money supply. The concept is pretty simple: when the money supply increases at a rate in excess of wealth output, there are more currency units relative to the supply of “wealth units,” where wealth units represent the number of goods and services supplied by an economic system – leading to more money “chasing” a relatively lesser amount of goods and services. When this subsequently occurs, the law of supply and demand dictates that price of the wealth units will rise.
Let’s take a look at the data. The chart below shows the price of gold vs. the CPI and the M2 money supply going back to 1990):
Read the rest of this article here: Kinesis Money
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If you are looking for mining stock ideas that should outperform the sector, especially junior microcap ideas, I publish the Mining Stock Journal, which now offers Stripe as a payment alternative to Paypal
Gold And Silver: Are We Entering Another Bull Cycle?
Based on the rate of depletion of gold and silver bars from bank custodial vaults in London and NYC, it’s fair to say a “low-grade” physical metals rush is in process – much of it flowing to large eastern hemisphere buyers. This disintermediation of physical metal has been widely documented. At some point Gresham’s Law will engulf a wider investor audience and morph into a full-blown run on physical gold and silver.
Based on the chart patterns, supported by strong fundamentals, it looks like the precious metals sector may be starting to diverge positively from the stock market, similar to the late fall of 2008. Andy Maguire and I discuss this topic as wells as several other’s in Kinesis Money’s Live From The Vault:
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If you are looking for mining stock ideas that should outperform the sector, especially junior microcap ideas, I publish the Mining Stock Journal, which now offers Stripe as a payment alternative to Paypal
FTX: Fraud Of The Decade So Far – Covered Up By The Biden Government
Courtesy of @FedProm
One of the primary purposes of FTX was to function as a giant “laundry mat” for the Biden Government to launder tax money sent to Ukraine, washed through FTX and back into the coffers of the Democratic Party – after, of course, Zelensky & Co. took their skim. The operation has Hillary Clinton’s finger prints all over it.
The Housing Market Crash Is Getting Worse
The following analysis is from my latest issue of the Short Seller’s Journal. You can learn more about this newsletter here: Short Seller’s Journal information
The November homebuilder sentiment index dropped to 33 from 38 in October. It was the 11th straight month of declining builder sentiment. Including the pandemic period, the future sales sub-index dropped to the lowest index reading since 2012. The traffic of prospective buyers fell off a cliff to 20.
Homebuilder sentiment transmitted to reality in the October housing starts/permits data released this past week. Housing starts declined 4.2% in October from September. Wall Street thought starts might drop 2.7%. The September starts number was revised lower to -1.3% from August. Single-family starts plunged 6.1% to the lowest level since May 2020. In addition, housing permits fell 2.4% from September to the lowest level since August 2020.
This chart shows why I continue to pound the table on homebuilder shorts and why I believe that homebuilder valuations still have a long way to fall:
The chart above shows the homebuilders’ sentiment futures expectations index (red line) vs October housing starts (green line). Both metrics ultimately reflect actual home sales activity, thereby signaling a continued decline in home sales – new and existing. This data likely will continue to head south, as the U of Michigan’s consumer sentiment survey for November showed that consumers regard current home buying conditions as the worst in the history of the data series, which goes back to 1978.
October existing home sales released Friday were crushed, down 5.9% and from September and 28.4% YoY on a SAAR basis. Existing home sales have declined nine months in a row to the lowest SAAR rate since December 2011. On a not seasonally adjusted basis, sales were down 13.3% from September (some seasonality in that number) and 29.5% YoY (no seasonality in that number).
I would argue that the YoY not adjusted number statistically reflects more accurately the degree to which the housing market is contracting. Single family home sales (not including condos/co-ops) fell 6.4% MoM on a SAAR basis and 29.1% on a YoY not adjusted basis. Using the NAR data for median sales price, YoY for October the median price is still 6.2% higher. But the price is down 8.5% since its peak in June 2022.
The last time the existing home sales SAAR was at its current level, the Dow Jones Home Construction Index was trading in the low 500’s (currently its at 1,232). New home sales for October will be released Wednesday. But the October SAAR was 603k. The last time the new home sales SAAR was that low was October 2016. Back then the DJUSHB was trading in the 500’s:
This is why I continue to be baffled by the valuation levels of the homebuilders. The only rationale I can conjure up is that a large segment of perma-bull investors is convinced that not only will the Fed pivot soon but that a pivot with more QE will revive the housing market. But in 2008 it took nearly three years after QE began before the DJUSHB began to begin a bull market run.
The housing market crash is thus starting to accelerate. If I’m wrong, how come insiders have not been buying shares of their companies in the open market after the 30-40% decline from the late 2021 highs? I went through the SEC form 4 filings for DHI, PHM, LGIH, TOL, LEN, KBH and BZW. Not one open market purchase in the last 12 months. The “buys” are zero-cost options exercised and the shares are immediately sold. The amount of insider selling in the sector is breathtaking, if not embarrassing.
Is A Gold (And Silver) Rush About To Occur?
There will be bear markets about twice every 10 years and recessions about twice every 10 or 12 years but nobody has been able to predict them reliably. So the best thing to do is to buy when shares are thoroughly depressed and that means when other people are selling – John Templeton
The following analysis is an excerpt from the October 20th issue of the Mining Stock Journal. It also was published by Kinesis Money
Looking for value in the stock market takes on a few different forms. The most hard core version in my opinion is that of looking for stocks that trade below tangible book value (shareholder equity on the balance sheet), where the value of assets net of intangibles minus liabilities exceeds the market cap of the company. Another flavor of “value” investing is to look for the stocks in companies with good fundamentals that, for whatever reason, the majority of investors are selling or avoiding (contrarian investing). A third version is to look for relative value. This graph is an example of the latter:
The chart above shows the ratio of XAU to the S&P 500 going back to the beginning of 2001, which is when the mining stocks bottomed from the bear market that started in 1980. The chart illustrates the value of the mining stock sector relative to the general stock market only two previous times over the last 21 years. Currently mining stocks are better value relative to the rest of the stock only two times in the last 21 years: at the beginning of 2016, after the vicious 4 1/2-year bear market that began in mid-2011, and in late 2018, when Fed monetary policy caused a big sell-off in financial assets.
Looking at the chart from a technical analysis perspective, the ratio is in an uptrend, which is potentially a bullish indicator for the sector. In 2016 the ratio reflected the fact that the general stock market was rising while the mining stock sector was declining. In 2018 and currently, the drop in the ratio is a function of the fact that mining stocks have been declining on a percentage-basis at a faster rate than the rest of the stock market. However, note that recently the ratio bounced from the trend line, indicating that mining stocks are starting to outperform the S&P 500.
Read the rest of this commentary at Kinesis Money
Physical Gold, Central Bank Secrecy And Gresham’s Law
When I first saw the reports from Reuters and Bloomberg that Central Banks bought 399 tonnes of gold in Q3, I was immediately skeptical of the data. As with all other mainstream media precious metals “news” vomit, I suspected the reports contained regurgitated numbers for the purpose of misdirection. As it turns out, Bullionstar’s Ronan Manly takes the WGC to task and exposes the degree to which the report is highly flawed, if not completely fabricated.
Cui bono? The truth-seeking, gold investing community has been exposing the WGC as a fraud for a couple of decades. In all likelihood Central Banks, particularly the ones in the eastern hemisphere, have been quietly accumulating multiples of that 399 tonne number during 2022. But with the massive drain of physical gold and silver from custodial vaults in London and NYC, the WGC likely was compelled to offer an “official” cover story for the large quantities of metal being transferred into the possession of private entities.
So that leaves “confidential information regarding unrecorded sales and purchases”.
So basically, as you can see, the World Gold Council’s claim of central banks buying over 310 tonnes of unreported purchases in Q3 is based on a suggestion from Metals Focus, which is based on ‘confidential information’. And since no one knows what this ‘confidential information’ is, nor where it came from, there is no way to verify it.
How’s that for “granular and transparent estimates for gold demand”?
So now you can see the problem. Apart from undermining any sense of confidence in the data that the World Gold Council and Metals Focus have seemingly pulled out of the ether, there is also the problem that the major financial news outlets all ran with the 400 tonnes number for Q3 central bank gold demand, and didn’t point out the obvious issues with the data. And this reporting was everywhere this week, in multiple articles all over the world and across the web.
So instead of questioning the data and using some of it’s 4000 London staff to go out and investigate the identity of the central banks in question, Bloomberg is content to run with the World Gold Council / Metal Focus ‘substantial estimate’ that is based on non-verifiable ‘confidential information’, and to write shallow clickbait articles…referring to a secretive bunch of unidentified sovereign buyers. All Bloomberg can do is speculate that it might be China or Russia or India or some of the middle eastern nations.
Read the full article here: Gold Establishment Supports Central Bank Secrecy instead of Exposing it
Amazon $AMZN: The Path Of Least Resistance Is Down
The forces of economics are catching up with AMZN. First and foremost its businesses, including the cloud services (AWS), face stiff demand headwinds as the global economy sinks further into the abyss of recession. Second, AWS’ gilded veneer is peeling away as its growth rate recedes and its margins contract. Finally, the Company as a whole has been adversely affected by soaring costs, which can be covered over with accounting games while revenues are growing quickly but which rear their ugly when the economy heads south.
I think AMZN’s share price has at least another 50% downside from the current level. The analysis below is from the latest issue of my Short Seller’s Journal:
AMZN’s stock price plunged as much as 19% after hours Thursday (10/27) after reporting horrific Q3 numbers (it finished the after hours session down 12.6%) . Though the GAAP EPS “beat” estimates, revenues missed estimates and AWS sales growth was nearly 500 basis points lower than expected (27% YoY vs 31.9% forecast by the Street). The total revenue growth rate was the slowest in over 20 years. The Company also guided to Q4 revenues that were well below the Street estimate ($140 to $148 billion vs $156 billion expected).
While the revenue growth rate was much slower than expected, costs soared. And though the gross profit rose slightly (probably from GAAP accounting games), the cost of fulfillment jumped from 33.5% to 34.5% of Product sales (e-commerce + Whole Foods, primarily). As a whole, operating expenses soared while the operating profit margin plunged to 1.7% from 4.3% in Q3 2021.
AMZN’s Product Sales generated a $2.87 billion operating loss ($412mm in North America and $2.46 billion in International). AWS’ (cloud computing services) revenue growth rate slowed considerably. AWS’ operating margin dropped to 26% from 30.3% in Q3 2021. AMZN’s P/E multiple will rapidly decline if AWS’ growth rate continues to slow and its margins continue to contract. AWS is 16% fo AMZN’s revenues but it is the reason that AMZN sports a P/E ratio of 92 and a forward P/E of 56. The market will have to reassess the multiple it is willing to pay with AWS’ growth rate slowing and likely to slow more going forward (AMZN announced a hiring freeze at AWS two weeks ago).
I think the easiest money shorting AMZN has been made. However, it hit a low of $80 in March 2020 (down 22% from Friday’s close) and it hit low of $67 in the late 2018 market sell-off (down 35% from Friday’s close). With these levels as potential downside targets when the stock market rolls over again, it’s worth tracking AMZN and shorting it or buying longer-dated OTM puts if it rallies back to the $110-$120 range.
The Housing Market Appears To Be Melting Down Rapidly
When the CEO of a homebuilder admits publicly that “demand clearly slowed” during Q3 and was “even more challenging in October,” you know the market is in trouble. Unfortunately for the CEO of $PHM, the housing market is in worse shape that just “challenging.” But I’m sure he knows…I’ll be reviewing Pulte Homes in the next issue of the Short Seller’s Journal. The commentary below is from the October 23rd issue.
The housing market appears to be dissolving quickly. The National Association of Homebuilders sentiment index fell for the 10th straight month to 38 vs expectations of 43.
The chart above (sourced from Tradingeconomics.com) shows the index over the last 25 years. The index is based on a monthly survey of homebuilders regarding the rate of current sales of single-family homes, sales expectations for the next six months and prospective buyer showings. The sales expectations sub-index fell to 35. Except for the pandemic plunge, it’s the lowest reading since August 2012. However, in August 2012 the Fed’s QE was in full-swing and the index was rising.
To put the chart above in the context of homebuilder valuations, The last time the index was at 38 and headed further south was late 2006. The DJUSHB had declined about 37% from its then-ATH in 2005. It eventually bottomed in March 2009 after falling another 78%. The total decline over the nearly four-year period back then was 86%. Currently the DJUSHB has declined 37% from its ATH in December 2021. This is why I have been arguing that homebuilder valuations do not remotely reflect that coming carnage in the housing sector and homebuilder stocks. There’s still a considerable amount of downside that remains
On Friday the base interest rate for a 30-year fixed rate conforming mortgage hit 7.37%, the highest in 22 years. But that’s the base rate for a borrower with a 740 FICO and a 20% down payment. The mortgage rate for a sub-740 FICO and less than 10% down will exceed 8%. These numbers won’t help mortgage purchase applications, which declined again last week. The purchase apps index dropped to 164.2 from 170.5 the previous week. It’s back to where it bottomed and drifted sideways between late 2010 and 2015. The mortgage purchase applications index is down over 53% from its peak in early 2021. The base 30-year fixed mort-gage rate a week ago was 6.94%. The jump to well over 7% should translate into another weekly decline in purchase apps.
Housing starts in September also fell 8.1% from August and were below Street expectations (-7.2%). Permits rose 1.4% but this was attributable to rental unit permitting which rose 8.2%, as single-family permits dropped 3.1%. Most homebuilders build single-family homes and some townhomes. The decline in starts and permits for single-family homes should not surprise, as homebuilders currently are working on a record number of homes in various stages of inventory, many of which have had contract cancellations. This is going to get very ugly both for homebuilders and home prices.
Existing homes for September fell on a SAAR basis (seasonally adjusted annualized rate) for the eighth month in row, falling 1.5% from August. The single-family sales component fell 0.9% on a SAAR basis. But the not seasonally adjusted monthly numbers show a 9.2% decline from August and a 20.8% cliff-dive from September 2021. While the August to September change would have seasonal variances, the YoY comp is likely a decent barometer for the degree to which home sales are contracting. The National Association of Realtors data shows an 8.1% price increase from September 2021 but 7.1% decline from the peak in June.
The chart above puts the current housing bear market in context with the bear market that followed the previous housing bubble. It took trillions in Fed money printing and a near-zero Fed funds rate policy to revive home sales after the last bubble. In addition, it took a series of changes to the parameters for a Fannie/Freddie guaranteed mortgage, starting with reducing the down payment requirements to 3% from 5%, and increasing the size limit of the mortgage, making it easier to qualify. This also lowered by quite a bit the credit quality of the homebuyer pool. It also took trillions and a near-zero interest rate policy after the pandemic crash to juice home sales.
I continue to believe that, barring a sudden sharp reversal in the Fed’s monetary policies, the homebuilders are a no-brainer short. I still own LGIH ($78) puts of various “flavors.” I most recently booked profits on my December 95’s and added March $80s. While I think any of the homebuilder tickers are good shorts, LEN and DHI have not dropped as much as the most of the others, in case you are looking for some names to short. I also continue to really like BLDR and BECN. I think both stocks will be cut in half, at least, before this bear cycle is complete. Note: LGIH reports on 11/1 (before). Keep in mind its Q3 closings were down 23.6% from Q2 and 38% YoY.
Another name that I like as a short that continues to puzzle me is ABNB ($119). I presented the idea a few months ago. It performed well as a short but then shot higher during the June-August market rally. Between August and September, it tested the $125 level and turned lower. It traded down to $100 in September but now appears to be headed for another test of $125.
On an Airbnb Superhosts community chat, several hosts complained about a big drop in bookings: “We went from at least 50% occupancy to literally 0% over the last two months.” Another post said “What’s going on with Airbnb? No bookings at all.” Marketwatch published a report Friday in which it cited several hosts who were experiencing a sudden decline in bookings that began during the summer.
There’s a few factors at play. The number of ABNB hosts soared after the pandemic. A not unmeaningful percentage of home sales since June 2020 were by mom & pop investors who played the housing bubble by chasing investment properties and renting them out through ABNB. The travel boom after the Covid restrictions were lifted fueled this boom. But the most probable cause of the drop in bookings is a widespread and deep cut-back in household discretionary spending. Airlines started reporting a decline in bookings starting in mid-July.
ABNB reports its Q3 numbers on November 1st after the close. I have to believe that the Company either will disappoint vs forecasts or issue a warning. The fate of the stock between now and the earnings release will depend in part on the short term direction of the stock market. For now, I’m going to wait to see if ABNB trades up to test the $125 resistance level again. But I will likely put on some puts ahead of earnings to play a “miss.” I also think there’s a good chance that a material number of ABNB property investors will be forced to sell their homes/apartments, which will put further pressure on the housing market.