Kuppy on Inflation

[jfan]

On 1/13/2025 at 1:09 PM, Gregmal said:

With home prices where they are now the floor on per lot profit and margins is in and only inflecting higher. On the $2.2-2.5b pipeline estimate, as was described in the thread, column one is basically inventory; cash pricing is for much of it locked, just need to slap a tax rate on it. Column two is profit per lot, pricing marked to market, and column 3 is eventually the same as 2. Excluded in this was LMWS which is also another fairly easy valuation exercise.

I went back to listen to the 2024 annual meeting and Marek was describing the 3 columns and the capital intensity (ie soft and hard dollars) at 44 minutes. He said that the majority of the capex spend occurred when the homesites move into platted/underdevelopment column. 

 

I assume the capex for homesites sold in 2024, probably occurred in 2021 to 2023 (? over a 3 year period) and that a larger portion is spent in the early years vs later on. They report total net residential capex each year since 2015 but not by individual community. Is the company willing to share with investors this granularity?

 

@thepupil I'm not sure if this is the correct approach but in the footnotes, they describe capitalization of their real estate development expenditures (see below). This would smooth the numbers but may not reflect the actual cash expenditures.

 

Since I don't have the community by community data, nor the exact timing or magnitude of the expenditures, I thought perhaps another way to look at this from an aggregate bird's eye view of the issue, is by looking at the cumulative totals over time and calculating the per unit revenues and capex with each passing year. My rough guess is that they moved ~ 6000 homesites through column 1 (platted/under development) since 2018. This is all backwards looking of course.  

[thepupil]

Good stuff! Thanks. Seems fairly consistent with the even higher level reported accounting of the segment.

 

so given what you’ve done above and that we know the following 

 

As of 9/30

 

1) there’s $150mm of resi RE inventory

 

2) there’s 1300 or so homesites under contract for expected revenue of $122mm ($94k/lot)

 

3)there’s 2400 platted lots, 1300 ex LWMS, 4K engineered, and the rest for 22k total

 

how does this roll up into your valuation if JOE?

Does the exercise make you more bullish or bearish of JOE at current prices?

[Spekulatius]

6 hours ago, jfan said:

I went back to listen to the 2024 annual meeting and Marek was describing the 3 columns and the capital intensity (ie soft and hard dollars) at 44 minutes. He said that the majority of the capex spend occurred when the homesites move into platted/underdevelopment column. 

 

I assume the capex for homesites sold in 2024, probably occurred in 2021 to 2023 (? over a 3 year period) and that a larger portion is spent in the early years vs later on. They report total net residential capex each year since 2015 but not by individual community. Is the company willing to share with investors this granularity?

 

@thepupil I'm not sure if this is the correct approach but in the footnotes, they describe capitalization of their real estate development expenditures (see below). This would smooth the numbers but may not reflect the actual cash expenditures.

 

Since I don't have the community by community data, nor the exact timing or magnitude of the expenditures, I thought perhaps another way to look at this from an aggregate bird's eye view of the issue, is by looking at the cumulative totals over time and calculating the per unit revenues and capex with each passing year. My rough guess is that they moved ~ 6000 homesites through column 1 (platted/under development) since 2018. This is all backwards looking of course.  

The spreadsheet is actually pretty good for a big picture view. No dog in this fight and just looking at this like any other Capex driven business with leading and trailing indicators , this looks to me like they had a huge bump in 2021/22 and momentum is now stalling or even  reversing a bit.

 

Revenue per homesite is flatish

Contracted homes (future revenue  - Leading indicator is dropping)

Sold homes still rising but because of above, I would expect it to drop.

Gross margins dropping

 

Maybe I am missing something but this looks bearish to me.

 

[John Hjorth]

You guys constructively discussing JOE here should really leave this topic [in the General Discussion forum], meant in a positive way, to continue the discussions in the separate JOE topic [in the Investment Ideas forum]. 

 

It's a real pitty this ongoing discussion by now is going on here, and not in the separate JOE topic, meaning it 'drowns' here, over time, not tied to JOE. 

 

Peace, and enjoy your Sunday! 

[Gregmal]

Im happy to answer questions in the JOE thread per @John Hjorth's suggestion, to the extent things dont get too redundant; in which case Ive probably already answered what I can. But to reiterate, all youre gonna extract from 2021/22s numbers is the builder sentiment form 2018-2020; and that they sold a lot of Camp Creek(a finite community) lots at $400-500k per. 

[Paarslaars]

https://pracap.com/theyre-gonna-choose-to-run-it-hot/

 

Kuppy getting a bit cynical on the macro side.

 

Strange argument stating that the rest of the world is intentionally overproducing and forcing americans to buy it...

[Parsad]

9 minutes ago, Paarslaars said:

https://pracap.com/theyre-gonna-choose-to-run-it-hot/

 

Kuppy getting a bit cynical on the macro side.

 

Strange argument stating that the rest of the world is intentionally overproducing and forcing americans to buy it...

 

That's the biggest pile of horseshit I've read this year!  What the hell was that?  So, the world was force-feeding a giant U.S. baby and making it obese...not that the U.S. was a fat fucker who wanted to stuff his face with all the Big Macs he/she could eat.

 

His argument is a complete mish mash of garbage that makes zero sense, other than there are/were trade imbalances that could not continue and that Trump's actions (calculated or just plain dumb luck) have made that problem, among others, blatantly obvious.

 

He could have just said that...and to buckle your seats.  He also turned bearish in August of 2022...that's a hell of a lot of opportunities given up in that time.  That's why I try and not read this type of crap...people with too much time to try and figure out things that are just in the "way to hard pile!"  Look for cheap stuff and forget all of this!

 

Cheers!

[Castanza]

Americans have an addiction problem…look at credit, personal debt and savings rates. Hell you can now do pay in four loans for fast food…delayed gratification is an antiquated idea to most Americans. That chicken comes home to roost eventually. Exactly why I live a debt free life…people have been brainwashed to maximize “opportunity cost” without regard for their personal finances. If troubled waters are ahead it’s going to be one Hell of a big wake up call for many. 

 

 

 

[Castanza]

5 hours ago, Parsad said:

 

That's the biggest pile of horseshit I've read this year!  What the hell was that?  So, the world was force-feeding a giant U.S. baby and making it obese...not that the U.S. was a fat fucker who wanted to stuff his face with all the Big Macs he/she could eat.

 

His argument is a complete mish mash of garbage that makes zero sense, other than there are/were trade imbalances that could not continue and that Trump's actions (calculated or just plain dumb luck) have made that problem, among others, blatantly obvious.

 

He could have just said that...and to buckle your seats.  He also turned bearish in August of 2022...that's a hell of a lot of opportunities given up in that time.  That's why I try and not read this type of crap...people with too much time to try and figure out things that are just in the "way to hard pile!"  Look for cheap stuff and forget all of this!

 

Cheers!

 

Americans have an addiction problem…look at credit, personal debt and savings rates. Hell you can now do pay in four loans for fast food…delayed gratification is an antiquated idea to most Americans. That chicken comes home to roost eventually. Exactly why I live a debt free life…people have been brainwashed to maximize “opportunity cost” without regard for their personal finances. If troubled waters are ahead it’s going to be one Hell of a big wake up call for many. 

 

 

[Blake Hampton]

7 minutes ago, Castanza said:

Americans have an addiction problem…look at credit, personal debt and savings rates. Hell you can now do pay in four loans for fast food…delayed gratification is an antiquated idea to most Americans. That chicken comes home to roost eventually. Exactly why I live a debt free life…people have been brainwashed to maximize “opportunity cost” without regard for their personal finances. If troubled waters are ahead it’s going to be one Hell of a big wake up call for many. 

 

There's a lot of companies that couldn't survive two months without access to credit markets. These same ideas apply to businesses as well.

 

Edited April 14, 2025 by Blake Hampton

[Dalal.Holdings]

9 hours ago, Paarslaars said:

https://pracap.com/theyre-gonna-choose-to-run-it-hot/

 

Kuppy getting a bit cynical on the macro side.

 

Strange argument stating that the rest of the world is intentionally overproducing and forcing americans to buy it...

 

It's not really that hard to understand. Now Europe will have to swallow all those Temu goods:

 

https://www.nytimes.com/2025/04/14/world/europe/europe-china-dumping-tariffs.html

[Dalal.Holdings]

If you want to put Kuppy's post in context:

 

Private Consumption as % of GDP:

 

USA: 69%

Europe: 52%

China: 39%

 

If the USA enacts trade barriers and tries to brings its above number down, who will replace them and consume all those things that were meant for Americans? Will Europeans? They are already worried that China will be forced to dump their goods onto them...

[Spekulatius]

9 hours ago, Dalal.Holdings said:

If you want to put Kuppy's post in context:

 

Private Consumption as % of GDP:

 

USA: 69%

Europe: 52%

China: 39%

 

If the USA enacts trade barriers and tries to brings its above number down, who will replace them and consume all those things that were meant for Americans? Will Europeans? They are already worried that China will be forced to dump their goods onto them...

I think it’s very likely that China’s consumption will go much higher.

[Dalal.Holdings]

19 minutes ago, Spekulatius said:

I think it’s very likely that China’s consumption will go much higher.

 

If China’s consumption goes much higher, then the U.S. will have achieved a great strategic victory. It will create a large market to which the U.S. and others can export to, it should result in the CCP engaging in less currency manipulation/devaluation of the Yuan, and it should overall shrink the trade surplus China enjoys with ROW.

 

But the problem is that folks have been waiting for the Chinese to begin consuming for a long time and now they face population growth and other issues that will be headwinds. It sounds like culturally the Chinese do not like to consume—instead they put their capital towards real estate investments largely within China which have largely soured…

[gfp]

17 minutes ago, Dalal.Holdings said:

it should result in the CCP engaging in less currency manipulation/devaluation of the Yuan

 

Why do you believe that the CCP is manipulating the Yuan lower?  They are actually doing the opposite.  Fairly regularly.

[Jaygo]

1 hour ago, Dalal.Holdings said:

 

If China’s consumption goes much higher, then the U.S. will have achieved a great strategic victory. It will create a large market to which the U.S. and others can export to, it should result in the CCP engaging in less currency manipulation/devaluation of the Yuan, and it should overall shrink the trade surplus China enjoys with ROW.

 

But the problem is that folks have been waiting for the Chinese to begin consuming for a long time and now they face population growth and other issues that will be headwinds. It sounds like culturally the Chinese do not like to consume—instead they put their capital towards real estate investments largely within China which have largely soured…

 

The Chinese will consume and when it happens we will all be sorry as the worlds resources will get squeezed to hell. The reason it is taking a long time is down to psychology. The Great leap forward produced an entire generation of people who were terrified to loose it all. The great depression generation have similar characteristics of excessive frugality, hoarding and a propensity to save.

 

So that generation born between 1945 and 1965 ( basically their boomers ) is excessively frugal and their offspring ( millennials ) have some but not all those frugality traits. Layer in the tilted male to female ratio due to the one child policy becoming less pronounced thus allowing for more nuclear family household formation and you have the recipe for a major change in consumption. One more generation and you will have a massive consumption economy. I'd give it 10 years before the Chinese are the largest consumer market in the world by total spend.

 

[Dalal.Holdings]

9 hours ago, gfp said:

 

Why do you believe that the CCP is manipulating the Yuan lower?  They are actually doing the opposite.  Fairly regularly.

China has long moved to keep its currency low in order to support its exporters. It’s the only way they can hit GDP targets because most of their economy is production driven, not consumption. If they become consumers, then that calculus changes.

[Spekulatius]

4 minutes ago, Dalal.Holdings said:

China has long moved to keep its currency low in order to support its exporters. It’s the only way they can hit GDP targets because most of their economy is production driven, not consumption. If they become consumers, then that calculus changes.

The only manipulation that China does is having very strict controls for moving money out. Those keep the currency high not low. We also know that China intervenes when the Yuan-USD peg breaks towards the downside. The Yuan never was a freely exchangeable currency either.

 

The Peg itself tells us that the Chinese currency exchange rate versus the USD is managed, but it does not tell us in which direction. The likely reason why they do so is because they want to make life simpler for their manufacturing sector which now does not need to worry about exchange rate changes. However, now with US- China trade being sharply reduced due to traffic, I think there is a significant chance, that the currency Peg to the USD doesn’t make sense  for them, which means they may change their Peg towards a basket of currencies most likely.

[Dalal.Holdings]

The fact that they peg their currency tells you all you need to know. If it floated freely, it’s value relative to the dollar would be higher.

 

Econ 101 says that trade imbalances are transient because over time the country with the trade surplus has its currency appreciate and the one with the deficit has its currency lose value. Since China maintains a peg, that equilibrium cannot be achieved.

[gfp]

And yet they only intervene when the free market takes the CNY to the Weak-CNY-strong-USD edge of the trading band around central parity.  And then the next day they move the central parity target and the market pulls the peg further in the weak CNY direction - not the other way around.

 

I can't remember the last time I have seen the reserve bank of china intervene in USD-CNY on the CNY-is-too-strong side.

 

So there are controls for moving money out and there are regular interventions to stop the fall off their currency from market forces.  And every time they have to intervene to provide USDollars for their banks to circulate in China, the reserve bank of China sells some US treasury debt to get the dollars.  And the US press and most of this message board claim China is sending us a message or engaged in some geopolitical muscle flex, "oh my god, what if they go on strike and refuse to buy our debt and fund our lavish lifestyle!"  

Edited April 15, 2025 by gfp

[Dalal.Holdings]

The historical analogue: the Plaza Accords in the 80s when the Yen was forced to appreciate against the dollar. It probably led to the popping of the Japanese bubble in the late 80s.

 

The CCP views this as a catastrophic risk (a vassal of the U.S. like they view Japan as) and they’ve actively tried to avoid it. They want their currency to be weak so they remain an export powerhouse

 

Chinese Media Warns of Japan's Plaza Accord Lessons 
https://www.bloomberg.com/news/articles/2018-08-17/chinese-media-warns-of-japan-s-painful-lessons-from-plaza-accord
 

Edited April 15, 2025 by Dalal.Holdings

[Dalal.Holdings]

3 hours ago, Spekulatius said:

The only manipulation that China does is having very strict controls for moving money out. Those keep the currency high not low. We also know that China intervenes when the Yuan-USD peg breaks towards the downside. The Yuan never was a freely exchangeable currency either.

 

The Peg itself tells us that the Chinese currency exchange rate versus the USD is managed, but it does not tell us in which direction. The likely reason why they do so is because they want to make life simpler for their manufacturing sector which now does not need to worry about exchange rate changes. However, now with US- China trade being sharply reduced due to traffic, I think there is a significant chance, that the currency Peg to the USD doesn’t make sense  for them, which means they may change their Peg towards a basket of currencies most likely.

Foreign capital flows into China has also declined in recent years since the crackdown on Jack Ma and covid. This means the currency declined.
 

Because China treats foreign capital so poorly (ie. Risk of asset seizure, onerous regulations, favoring state owned firms, etc), these flows have precipitously declined which is another factor that has driven the Yuan’s value down. 
 

China was supposed to open up and become a consumption oriented economy. These things would have driven the Yuan higher. But under Xi, this was not allowed to happen.

[Spekulatius]

Yes China being an autocratic state with little rule of law is one way to depress a currency but it’s not necessarily currency manipulation.

[Dalal.Holdings]

There is plenty of debate on the topic, but we know for a fact that China has devalued its currency in the past to boost its exporters. It is likely that they are stealthily doing the same now. A strong currency would be very disruptive to their economy as it stands. As they say "show me the incentives and I will show you the outcome". 

 

 

 

https://realeconomy.rsmus.com/the-new-mercantilism-tariffs-and-currency-manipulation-in-an-era-of-u-s-china-tension/

 

 

Quote

The outlier among this group has been China, whose growth has propelled it to the top tier of industrial nations, but whose currency value has been sinking in real terms.

 

To some observers, this suggests that China has been engaged in currency manipulation. Put another way, it is selling the renminbi to keep Chinese-produced goods more competitive than goods made elsewhere.

 

[gfp]

Uh Oh Greg!  Ya boy Kuppy is all cashed-up!

 

https://pracap.com/taking-my-ball-and/?utm_medium=email&_hsenc=p2ANqtz-8Ll_Iu9mYdvk76o9i293OONoHCTXB-Vm_8rGTMyzgy-UC0pRctCmuOIP7Yzdrvoy7e52y89QKMNKgjuyh-I9HTsZYV_g&_hsmi=363926384&utm_content=363926384&utm_source=hs_email

 

I obviously disagree with his take on the looming debt crisis but I was sort of coming around to his idea that they would be forced to "run it hot!"  LOL