Housing Numbers: The Truth Behind It All

Ryan Cole, The Investment U Research Team

Continuing our series looking at the truth behind current economic data, today we turn to housing numbers.

Housing has been in the news lately, with a few “green shoots” of news. Most recently, home prices ticked upward last month, even though they’re down compared with a year ago. Many analysts are reading this as a sign that the worst is behind us, and we could be in for a quick recovery.

Don’t be so sure.

We Won’t Foreclose… For Now

First, there’s one important fact that most analysts have forgotten, or at least aren’t revealing.

That is, the six largest lenders – businesses like Citibank, Bank of America, etc – and Fannie and Freddie got together earlier this year and declared a three-month moratorium on foreclosures.

They all agreed,

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Investors in common stocks tend to ignore warning signs coming from the credit markets, often at their peril. Right now, the credit markets are broadcasting the following warning: The equity of overleveraged REITs is at risk of elimination or permanent impairment.

Yet the stocks of real estate investment trusts (REITs), which are popular among income-oriented retail investors, are still trading at high enough levels that discount just a garden-variety recession in commercial real estate. REITs were designed to invest in portfolios of rental properties, and generally pay no corporate income taxes if they distribute at least 90% of their profits as dividends to their shareholders.

REITs were designed to thrive in an environment of steadily rising property values and rents. But in this ice age for commercial real estate, the REIT business model will cease to function properly; a REIT’s tax-free status doesn’t allow it to retain much excess

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Investors in common stocks tend to ignore warning signs coming from the credit markets, often at their peril. Right now, the credit markets are broadcasting the following warning: The equity of overleveraged REITs is at risk of elimination or permanent impairment.

Yet the stocks of real estate investment trusts (REITs), which are popular among income-oriented retail investors, are still trading at high enough levels that discount just a garden-variety recession in commercial real estate. REITs were designed to invest in portfolios of rental properties, and generally pay no corporate income taxes if they distribute at least 90% of their profits as dividends to their shareholders.

REITs were designed to thrive in an environment of steadily rising property values and rents. But in this ice age for commercial real estate, the REIT business model will cease to function properly; a REIT’s tax-free status doesn’t allow it to retain much excess capital during lean

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Representative Carolyn Maloney (D-NY), the head of the congressional Joint Economic Committee, is on record as believing that commercial real estate (CRE) is a ticking time bomb, as funding for commercial loans were virtually shut down last year when the financial system became paralyzed, with financing of even health properties remaining extremely difficult to obtain. Commercial loan delinquency rates have doubled to approximately 7.0% year over year. Add to the mix that owners of shopping malls, hotels and offices have been defaulting on loans at a significant rate, its is understandable why General Growth Properties (GGWPQ), the second largest owner of shopping malls, sought Chapter 11 bankruptcy protection. Clearly, as more companies downsize and retailers close their doors, small and regional banks may experience substantial risk of severe losses from commercial real estate loans. The pressures are not expected to improve until economic improvements are experienced ...

Interesting market today as a few items on my watch list were moving lower. I was tempted to pull the trigger on a few, and put some orders out there, but nothing filled.br /br /-Natural Gas inventories came in lighter than expected, and this helped move UNG higher. Not adding to this unless it gets below 12.00br /br /-I saw Todd Sullivan and Doug F/wsmco.com bought some Saks (SKS), and considered some myself. This stock seems to be quite volatile as it has the uncommon pairing of low share price and average daily volume. Their same store sales came in better than expected, and Todd has done a nice job explaining their advantages over their peers. a href="http://valueplays.blogspot.com/"Check out his blog for more info on Saks/a.br /br /-I had an order out at the end of the day to pick up more General Growth Properties ...

I picked up a small position in General Growth Properties (a href="http://finance.yahoo.com/q?s=GGWPQ.PKamp;="GGWPQ/a) yesterday. I watched this stock climb from below $1.00 to $3.00 in a short time period on hype due to Bill Ackman's speech saying the stock will be worth $20-$30/share when the company exits bankruptcy. I would like a few more shares, and will add more at better prices if I can. Overall, this will remain a very small position due to the inherent risks of a company in Chapter 11, no matter how good the outlook for the future of GGP may be . So the typical disclaimer goes out on this one. Only spend as much on this stock as you're willing to lose, because there is the potential to lose it all. I've read up and studied a lot on this (a href="http://valueplays.blogspot.com/"Todd Sullivan has some great stuff on ...

Wall of Worry Grows over Rally

by The Investment U Research Team

As doubt grows about the sustainability of the current rally and the strength in the financials, the possibility of another bottom increases. Our colleagues are fond of saying, as the proverbial “wall of worry” grows, the longer it remains, the better its chances of being right.

And we seem to only be adding support to this theory.

Yesterday we discussed how the Bank Stress Tests could be the only thing big enough to cause another market rout, but we keep stumbling upon newer and even scarier drivers of a changeover.

As the banks rush to get rid of their “scarlet letters,” namely T.A.R.P, they may be getting rid of one shackle and adding another. Getting rid of government funds may not be the smartest thing.

The potential

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For Immediate Release

Chicago, IL - April 9, 2009 - Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: GlaxoSmithKline plc (GSK), General Growth Properties (GGP), Agria Corp (GRO), Regis Corporation (RGS) and Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA).

Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=4579.

Here are highlights from Wednesday's Analyst Blog:

Glaxo's Avandia Issue Priced-In

Sales of Avandia have been significantly negatively impacted due to safety concerns, but it appears they have recently stabilized. We believe that sales are now at, or very near, their bottom. While sales of Avandia have been

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Bargain Hunting in REIT Market Wreckage’ by Investment U Research Team

The World Gold Council released a survey of investment advisors that places gold at the top of the list of preferred investments this year.

When everyone is in agreement that gold is the place to be, that’s when you should be heading for the exits. Two of the interesting things from this survey stuck out to us – apart from the fact that the gold may be getting ahead of itself…

One, almost 60% of the respondents expected better market conditions next year. Interesting, considering the broader markets have been hammered to the point beyond rational flights to safety. It tells us there’s a lot of advising of clients to “wait.” But wait for what? When will these “advisors” encourage their clients to get back in?

Two, at the bottom of the list

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Wise investors have traditionally headed for real estate investment trusts (REITs) for their regular, sizeable dividends. Over the past two years, we have grown accustomed to bi-annual payments of 6%, 8% or even 10% of share price.

What if I could tell you one REIT is currently paying over 350%? You would think it is too good to be true.

Of course, you would be right. General Growth Properties (NYSE:GGP), with its $0.43 share price and last dividend payment of $2 per share, may pop up on the screens of investors looking for a big dividend, but there is absolutely no way you should expect to see any dividend from this REIT, let alone anything close to a double-digit payout.

Desperate for cash

General Growth is the latest company to announce it is on the verge of bankruptcy due its tremendous debt load. Like so many other now-defunct companies, General Growth used all

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