mpauls
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Posts posted by mpauls
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Beware of falling Apples.
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Anyone here involved in the distribution side of the business?
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A few of you scare me with all that cash. No one knows when and by how much, but we are certain to have above average inflation. The purchasing power of your cash holdings will effectively be taxed by an amount equal to the difference between the interest rate on cash and the inflation rate. Its not as though anyone will be able to warn you ahead of time, since once we recognize inflation's presence-it's too late.
-Hear Reason, or she'll make you feel her.
-look before, or you'll find yourself behind.
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The full version is attached as a pdf You must be logged in to download the file. or you can view it here http://issuu.com/mpauls/docs/housing_builders_and_buying
Housing, the Economics of Builders, and Negotiating a Deal.
Considering the purchase of a new home, but concerned about falling prices and negative equity? With a little thought you may still be able to get the house you want and sleep well too.
I recently advised a real estate transaction for a family friend. This may be somewhat of a unique situation, but something to consider.
Summary of the Situation
The Buyer, a family friend, lives in a very nice well established neighborhood, but was interested in a slightly bigger new house. They were interested in a newly developed (unfinished) subdivision. By unfinished I mean there are empty lots existing (about 1/3 remain). One of the builders offered to purchase the buyers house if unsold by closing.
Housing Summary
Supply will increase in the near term as foreclosure stalls pick back up. Increasing unemployment which currently stands at 9% and likely to increase to 12%, promises to depress housing demand further. Increasing unemployment has a twofold effect-it increases foreclosures and decreases mortgage qualifications which reduces demand. Reversion to normal lending standards, means there are less qualified home buyers, many of whom are currently in a negative equity situation and therefore won’t sell or can’t refinance. Shadow inventory e.g. homes near foreclosure, bank owned homes not yet listed, homes taken off the market by homeowners waiting for a more favorable market, etc., have not yet saturated the market, but will-which will only increase downward pricing pressure. With all the uncertainty does it make sense to buy a new home right now? I think with a little thought, patience, and selectivity the answer is yes.
Builders
Many builders have way too much vacant land-equal to several years of inventory based upon the builders previous 12 month unit sales. This is manageable when volume (units sold) are reasonable and sales prices are increasing. However this is no longer the case and many builders are having a difficult time funding land holdings.
As land values fall, so too must the selling price of existing home inventory and new builds. Builders are doing what they can to resist negative price competition. But for builders to reduce vacant, non-performing, inventory, i.e. vacant lots, they must continue to sell (existing complete or near complete) standing inventory before they can start to eat into vacant lots. Prices must give and builders face increasing pricing pressure from existing home sales, foreclosures, short sales, and the like. Builders are also getting pressure from lenders to remove excess capacity as quickly as possible. Land values are certainly in many areas in decline. Material costs like cement, wood, and other essentials have come down over the past 12 months. In many cases, houses that are standing currently as unsold inventory were built with materials purchased months ago. These costs have come down so the cost to build the next house costs the builder less. Good for the buyer, bad for the builder. Knowledgeable buyers will not pay more when they can pay less, but builders again are resisting the loss. No doubt, builders are happy to transfer their problems onto unsuspecting home buyers.
Pricing
New developments often have several builders to choose from. Builders of similar or equal quality must price their houses competitively. As one offers buyers more attractive prices, the others must eventually follow-an unfortunate reality to those with decent balance sheets.
Many builders are offering “new architecture” that is, smaller, less expensive (to build) houses in attempt to spur unit sales. (e.g. building second story master bedrooms are less expensive to build compared to main level masters bedrooms.)
“Green Shoots”
I believe the so called “Green Shoots” will turn out to be weeds.
Foreclosures are certain to increase. In many markets foreclosures have been quickly purchased and quickly taken off the market. But as more and more of these sprout they will begin to saturate local markets. Homeowners and builders will soon be forced to price homes in accordance with these foreclosures. Meaning housing is artificially high. Both Builders and homeowners are reluctant to lower prices, but will soon have little choice. The intelligent buyer wishes to avoid overpaying. With all the uncertainty, you should require an adequate margin of safety.
Negotiating with Builders
With land values in decline, builders need to reduce empty lots quickly, but can’t. Meaning you get to call the shots.
A few items to keep in mind:
Housing in many areas likely have another 5-10% to fall
I suggest you think about the value of a new house as its replacement cost
You have the upper hand in negotiations
Be smart not greedy
Continued in PDF
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We shouldn't get too hasty. Google hasn't quite taken Microsoft out of the desktop applications market just yet. This move by Microsoft makes Google's efforts much more difficult in this regard.
On a separate, but similar topic, I see google slipping a bit in search. For example, Say you own a product and want information on how to operate it or something related to functionality, Google does not offer you the option to filter out all of the retailers selling the product that you already own. I suspect this has something to do with all the ad dollars they generate from retail clicks.
So it is a wise decision and the most rational strategy for Google to go after Microsoft's core, but if they fail this is a big loss. Contrariwise it is Microsoft's best response to attack Google in Search, which too will be no easy task, but I think Microsoft will end up spending far less money attacking Google. I also think Microsoft office's product line will be a hard market to penetrate, customers are very captive to products that require a large learning curve. That said as long as Google can maintain their monopoly control of ad-share, they will have plenty of money to burn, but who knows whats around the corner for Google-and similarly for Microsoft.
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One of the stats that's floating around in news articles is capacity utilization of 65 pct. I assume that's industrial/manufacturing capacity. Probably does not refer to retail/distribution capacity, or office organization capacity - though the latter would be affected by state/local govt slowdowns. Maybe overall economic infrastructure capacity utilization of 80 pct? Whereas 90-95 pct might be normal??
I wonder if there is a similar calc re labour capacity - ie some calc of capability of people to do productive work, vs actual productive work being done (considering underemployment of skills as well as full unemployment). Might give another way to look at economic activity. Bet this is already done, and I just am not aware of the statistics. Any take on that?
Just wishing for another way to look at the economy, instead of focus on every tweak of a volatile number like new unemployment claims.
Normal capacity utilization appears to be in the 80's.
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Woodstove,
I think the derivatives are worth about $12 B or so to Berkshire. I think even more important is to adjust the earnings of Berkshire for the accounting "losses" from derivatives. When critics discuss Berkshire's derivatives book they overlook a few things that would largely put their concerns at ease. Though it is not certain where Buffett invested capital received for derivatives contracts, consider for a moment that he invested the $4.9 B received for equity puts as I briefly implied in the document. That is, I gave the example that if at the time of the contracts expiration the markets were down as they were after the great depression, Berkshire would need a 10.5% return to break even. (i.e. $4.9 @ 10.5% for 15 yrs. = about $22 B. Now compare this 10.5% to the yield on Wrigley's Notes & to GE & Goldman Pfd's. This is admittedly total speculation that he actually invested the capital this way, but I think it's not an unreasonable way to think about it. This is basically arbitrage. However also classic Buffett: protected on the downside, but hugely favorable on the upside. If markets return to normal levels Berkshire not only gets the 10% or so interest as profit but also benefits from the appreciation of the underlying common stocks of the warrants (at least with respect to this discussion, in proportion to the amount received for derivatives contracts).
What I mean is that expected loss is effectively zero due to interest, but the upside is huge in comparison. Why wouldn't you bet big in such a case-the odds are hugely in your favor, hugely.
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I wish they'd post the part that has the song from the Sound of Music.
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Derivatives book - value at $10b (pull out of hat, no worse than other crap estimates made above).
Woodstove, you might find this estimate (Attached on page 2) more or less compelling. Note: this estimate was made in April before the revision, but should offer a reasonable way to think about the value of their derivatives book. (FYI: This was already posted under a different topic)
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I find it amusing: They don't know how to calculate Float ;D
Though, the number the came up with may not be far off right now, it's not the right approach to the calculation. (Not at least in my mind.) Eventually this calculation will provide misleading numbers.
Don't ask.
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I don't know about this one. While they may have "withdrawn or reduced capacity" all this really says is that they transferred capital from one of many insurance businesses to another of Berkshire's operations. This could be another insurer, another operating business, or they could be in the process making a new acquisition. Furthermore, the last time I checked, Berkshire's larger insurers could cut their capacity by between 1/3 to 1/2 and still write the same amount of business as they did last year.
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Ask him if he is seeing collective efforts or if he is interested in trying to get a group to pressure SEBI to require companies to submit quarterly balance sheets as part of interim/quarterly "Financial Statements". Not only something so basic, but in a country with cheap and qualified labor it's inexcusable.
p.s. savant, I think in cases where businesses are not losing really large amounts of cash, and assuming the companies whose stock they own are good ones, I think you will find a group of these will perform well. Assuming you are able to identify how much really good businesses are worth and if you can buy them cheaply, this is the better option.
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Buy GM Bonds. Just Joking. I beg you not to listen to 95% of Financial Advisers. Personally I try to earn investors attractive risk adjusted absolute returns, which is code for: smart investing with the goal of doing better than the general market. Therefore, I do not feel adequately competent to address your question as it relates to investing strictly for income-though I have some ideas. I suggest you contact Tweedy Browne (tweedy.com). They have a relatively new fund that focuses on income and should do very well for your grandmother, and they also have other options. Though their high dividend yield fund is relatively new, they have operated a few large private accounts on the same basis for many years which have done very well. Christopher Browne, the son of the founder of Tweedy Browne (which was initially a brokerage firm many years ago,) is one of the most honest money managers in the business and you can be comfortable that his group will put your interests 100% before theirs. If they feel you have a better option that suits your needs outside their firm, they will tell you so. They however are New York based, but I'm sure they can accommodate your currency needs.
Best of Luck.
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You are certainly thinking correctly. I think you may have a tough time getting them to distribute, given the large ownership of managers. Not quite as attractive as buying the company and selling short the individual securities in equal proportion, but I think you would do just as well by investing in these companies alone based upon the net value of their securities holdings or if you think the intrinsic value of their security holdings are worth a good excess above the price at which the business is currently selling.
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Savant,
To your question on Merger Arb/Shorting: Its very hard to do in India because by-and-large shorting is not allowed. You can naturally do it for example with GDR's traded on exchanges outside India or if a global IB/broker is willing to do such a transaction with you, but it's certainly not like in the states. I personally wish they would be more open to short sales. There are restrictions to the % ownership foreign investors are allowed, but it varies by industry. If you partner with a businessman in India you can possibly have the option of a Joint Venture, but it in many cases it is not yet worth it. I believe however, you were more interested in taking control in order to distribute cash, replace management, or possibly to liquidate. This will be quite difficult if not impossible for a foreign investor. The system is not perfect for foreigners. That said, and I say this having been over there, there are some very smart and honest people running businesses in India, many of which are very profitable operating in conditions that are far from ideal. You just have to make sure you are dealing with good people. We have not had too much difficulty meeting with management. (FYI: Indian 10yr gov't bond yields are about 8%.)
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Yeah I remember that-I guess I thought it was down more than 8% since May, 2nd.
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I think at the current price the investment will compound at 30% annually for 5 years. I can't wait to see if he'll threaten to buy back stock.
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keerthiprasad
I can answer some of your questions first hand.
The barriers to entry in India are quite high if for no other reason, the time it takes to get FII status. It took us a very long time, but it is getting somewhat better. Its as though the SEBI drags their feet on everything. This also assumes you are not a resident of India.
Micro/Small Caps: Generally, the numbers can be trusted, you mostly have to be careful of the motivations of management. I feel like many of them just want to raise capital so they can quickly raise their pay. Also don't expect a balance sheet but once a year.
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What does he own?
Offer him, Apar Industries ltd. and ask for something interesting in return.
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I imagine it should be there. I will be deleting the link today.
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Keep your expectations low. There will be a lot of data that you will have to sort through, but it should provide what you need.
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Yes. You got it right. The fact that someone does for 10,000 hrs doesn't guarantee anything. It's hugely important to spend your time learning the right kind of concepts, ideas, etc., and it is very easy to stumble into the wrong things. If an individual buys into what they learned in business school then he/she is certain not only to learn the wrong sort of things, but by the time the individual figures this out it may be too late to really benefit (insofar as an outlier is concerned).
Similar in sports, practice does not make perfect, 'perfect practice' makes perfect.
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I've got a data file for you, but its way too big to upload here or to send via email (125 MB).
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The attachment might help.
Janet Tavakoli: Where Were Drama Pundits When it Mattered?
in General Discussion
Posted
None of these three have any relevance to me and I certainly would not call them "Pundits" without a negative connotation.