Wednesday, June 27, 2012

Golden Lies In The Media

The big banks have becoming hedge funds but are backed by the Fed and taxpayer funds. You think that provides them with a competitive advantage? The Fed encourages and abets big banks to trade like hedge funds so the banks can generate, even craft, earnings to keep them afloat. Bill King, The King Report
If you woke up this morning and read some of the headlines that pertain to the housing market, you might be convinced that the bottom is in and the next bull market in housing is starting.  Of course, it's funny how homebuilder, realtor and Government numbers diverge from one of the best "grass root" statistics:  mortgage purchase applications.  Mortgage purchase applications declined again last week: "The unadjusted Purchase Index decreased more than 2 percent compared with the previous week and was almost 3 percent lower than the same week one year ago."  Here's the report from the Mortgage Bankers Association:  LINK

How can the housing possibly be going through a recovery when purchase applications have been mostly lower week to week during the peak home selling season?  Makes no sense.  Either the mortgage bankers are lying or the homebuilders, realtors and Government are all lying.  I know which constituent I would bet is lying.  I will say, that there has been a lot of strength in the low price end of the market.  But this is coming from investors who are taking advantage of Government financing programs to buy low-end homes and turn them into rentals.  As I have shown in previous posts, Fannie and Freddie announced this program several months ago.  Ironically, they needed an outlet for all the homes they repossessed to make room for more foreclosures...wash, rinse, repeat.  A friend of mine had put in an offer on a lower end priced townhome last week in an area of Denver that had bubbled up during the housing bubble and she was topped by an investor who paid the full asking price.  This won't last and real buyers would be well advised to not chase it.

The other source of housing market euphoria was this morning's earnings report from Lennar.  The headline proclaimed a huge increase in earnings for the quarter and the CEO announced that the housing market was in recovery.  Of course, what was not in the headlines was the fact that LEN used a complicated accounting maneuver to generate most of its earnings.  Of the $453 million in reported GAAP earnings, $403 million of it was generated by a non-cash "reversal of the deferred tax asset valuation allowance."  Essentially, a deferred tax asset occurs when a company pays the tax man more in actual cash taxes than it reports in GAAP income for reporting to shareholder purposes.  There's two sets of books, the GAAP book and the "cash" book, or the book of numbers used to calculate actual tax payments to the Government.   There are "timing" differences for recognizing income between the two sets of books, and depending on the circumstances, in any given year a company may pay a lot more or a lot less the Government in taxes than it reports to investors in financial statements.  It's a great earnings management tool for management.

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