September 2006 Archives

I continue remain cautious on the economy in large part because of the softness in the housing market. Doug Kass, general partner of Seabreeze Partners Management, Inc. and commentator for The Edge Column on Street Insight (subscription required—part of TheStreet.com family), wrote an excellent article on housing early on the 28th September. The article Housing Headed to the Woodshed is freely available on TheStreet.com's free site. I urge you to read Doug's article.

Back in April 2005 (on the CNBC special), Lereah and the managements of Hovnavian (HOV - news - Cramer's Take), Prudential Realty and LendingTree were fully convinced (you might say glib) that the housing market was destined for a long boom. They saw a new paradigm of uninterrupted, noncyclical growth. One month later, Lereah was quoted as saying, "We simply don't have enough homes on the market to meet demand."

That was then, and it doesn't pay to dwell on the past. So let's look into the future. Unfortunately, many within the homebuilding business continue to talk their book despite clear trends that do not support their bullish view.

Forgive my preoccupation with the housing markets, but it has had a disproportionate role in economic growth since 2000 (and maybe before). This merits a continued discussion as to the possible slope of the decline, and the nature of the inevitable recovery. The housing cycle, among other variables, is a key influence on aggregate economic activity.

As a plug for Street Insight, I find this service worthwhile and recommend to those that are serious about investing to read it as well.

Today's Wall Street Journal article H-P Plans to Buy Voodoo, Start Push Into Gaming (subscription required) is interesting because Dell recently purchased Alienware, a maker of high performance computers.

Hewlett-Packard Co. said it will buy Canadian personal-computer maker Voodoo Computers Inc. and start a gaming division, its first major push into the small but profitable PC-gaming market.

Terms of the deal weren't disclosed. Closely held Voodoo Computers, Calgary, Alberta, makes high-end PCs that are popular with gamers who are willing to pay high prices for PCs with the latest processors and graphics cards. The acquisition follows a similar purchase by H-P rival Dell Inc., which in March bought Alienware Corp., a PC company also popular with gamers.

Voodoo computers sell for an average $5,000, compared with about $800 for the average consumer PC purchased at retail, analysts say. Roger Kay, an analyst with Endpoint Technologies Associates Inc., estimates Voodoo will have more than $115 million in revenue this year.

Hewlett-Packard Company (HPQ) is taking direct aim at another part of Dell's strategy. Recently I wrote two recent articles concerning Dell: Has Dell Lost Its Way? and Michael Dell Reinforces Support For Kevin Rollins. I urge you to read both articles, starting with the first. In the first article, I reference Rahul Sood's excellent blog post, which I strongly urge you to read as well. Rahul is president of and chief technology officer of Voodoo.

Given Dell's recent missteps and H-P's recent successes against Dell, this should be another challenging development for Dell.

Update

You should also read Rahul Sood's blog post Project Vampire is about to Fly....

In my prior post, I indicated once again that I remain bullish on commodities. Fellow blogger Wcw has a post titled Gasoline and GDP where he quoted the Energy Information Administration:

EIA supply data for the four weeks ending September 22, released earlier today, showed that gasoline product supplied (a proxy for demand) was up 3.8 percent compared to the same four-week period last year. However, it is important to remember that last year’s demand data were significantly affected by Hurricane Katrina, making demand this year seem greater in comparison than it would otherwise. Thus, any oil demand comparisons to last year over the next few weeks may seem somewhat larger than typical or expected, due to the effect last year’s hurricanes had in dampening demand temporarily.

While true that gasoline product supplied statistics are somewhat wonky because of Hurricane Katrina, if we step back and look at U.S. Weekly Total Crude Oil and Petroleum Products Imports (see graph), then we note that crude oil and petroleum products imports continue to climb. In fact, the latest import data for 22 September 2006 show that last week was the fifth largest import. This is, in part, why I continue to remain bullish on commodities.

• As everyone knows, the Dow crept within a mere two points of its all time high. CNBC's constant fascination with a potential new high point was nauseating because a high point does not have any particular significance. The stock market is not on fire. There are plenty of headwinds. The markets are rife with risk. The Dow's previous record of 11,722.98 was set on January 14th 2000, well over six years ago. And the S&P and Nasdaq remain well below their record levels. I, for one, am not getting too excited over the Dow's potential new record. And I wish CNBC found something more meaningful and insightful to discuss.

• I am generally bullish on commodities. Many pundits are claiming that, with slowing growth in the U.S., commodities will tank shortly. Possibly, but that is not my mindset. To increase the production of many commodities takes several years. In Alberta, to create a new oil sands operation takes at least four years once construction begins. And it takes many years before that. As I mentioned in my prior post How Far Away Is Peak Oil Really?, an integrated oil sands project requires about U.S.$35-$40 to break even. I expect that the supply costs for many commodities have risen and those costs will be reflected, or at least help to form a floor, for future prices.

• I believe the housing picture will get worse. Here in Calgary, the residential listings have recently exceeded 6000. In December of 2005, not even one year ago, the number of listings was 2000. So far the sales this month total nearly 2000. Or stated differently, there is about a three month supply on the market.

• I hope wherever you are, you are enjoying the fall colors. I took some pictures this past weekend in Calgary that show our fall colors of green and gold. With the cooler temperatures, there was some snowfall in the mountains.

The above picture is hosted at Flickr. If you click on the picture of Calgary and the Rocky Mountains, you will be directed to a larger version at Flickr. The picture looks much better when it is viewed in a large format.

According to an article in the Wall Street Journal Existing-Home Sales Decline As Prices Fall, Inventories Rise (subscription required), housing remains soft.

WASHINGTON -- Sales of previously owned homes in the U.S. fell less than expected in August, as prices fell compared with a year earlier, the National Association of Realtors said Monday.

The median home price was $225,000 in August, compared with a revised $230,000 in July. Last month marked the first year-to-year median price decline since April 1995, and it was the second-biggest in the survey's 38-year history.

Home resales fell to a 6.30 million annual rate, a 0.5% decrease from July's unrevised 6.33 million annual pace. Inventories of unsold homes rose to 3.92 million, a 7.5-month supply at the August sales pace, the most since April 1993

The housing market here in Calgary, Alberta appears to be cooling off as well.

The Calgary Real Estate Board website has a list of residential statistics. For a substantial part of last year and earlier this year, the number of listings and the number of sales per month were nearly the same. During the spring season, people literally held auctions as houses were in such tight supply. But recently, a gap has formed between the number of listings and the number of sales. In August, there was slightly over 4000 residential listings and 3000 sales. So far in September, there are 5981 listings and 1686 sales. Calgary has gone from almost no inventory to about three months of inventory in a very short time span. The 30-day average residential sales price has remained reasonably firm at C$372K (U.S.$333K) and the 30-day median residential sales price at C$335K (U.S.$300K).

I believe that the softness in home sales will be one of the stronger headwinds for the economy for the remainder of this year and next.