Friday, October 25, 2013

Housing Market Update - Pulte Home's Misleading Earnings - Short Homebuilders On Every Bounce

The housing market bulls never cease to amaze me.  Pulte Homes pulled a brazen earnings management stunt in their Q3 earnings reported yesterday and now I've got some former Big-4 accounting firm audit geek harassing me about my interpretation of accounting guidlines.  It's hilarious.  I couldn't resist but point out that it's the big accounting firms that tend to go under after they've been prosecuted and found guilty for aiding and abetting accounting fraud.  Anyone remember Enron?  That's why what used to be the Big 8 is now the Big 4.  In order to prevent further embarrassment to the highly paid regulators who are supposed to oversee the accounting standards being applied, the FASB and the SEC just made the accounting rules and standards significantly more liberal and  more open for a very wide range of "opinion."

At any rate, I never expect to leg into a short position at the very top of a trend - especially when I take short positions in volatile stocks with a high level of existing short interest in them, like the homebuilders. I always give myself room to double down - or "double up" in the case of shorting.

The homebuilder stocks spiked up dramatically on the back of what I consider to be very questionable net income numbers reported by Pulte Homes yesterday.  You can read my analysis of the situation here:  Pulte Home's Earnings Management Game

Remember as you read this, my analysis is in the context of my view that the housing market is in a long term bear market that started in 2006-2007.  The homebuilder stock bear market actually began in mid-2005.  What have seen in the last 18 months or so is a small "dead cat" bounce that was fueled by a couple trillion dollars in direct housing market stimulus by the Fed and the Obama Government.  Now this stimulus has run its course, the demand "pool" of available buyers has largely been depleted and the bear trend in pricing and volume is about to resume.  It will be a very cold shower for a lot of people who use "hope" as their investment strategy.

Have a great weekend.


  1. Corporate accounting is corrupt. Just ask the shareholders of Enron and WorldCom.

  2. Madoff has insisted all along that J.P. Morgan knew about Ponzi scheme

    Bernie Madoff has been insisting for five years that the banks knew and were complicit in his massive Ponzi scheme, that defrauded customers out of billions of dollars and left people devastated.

    “With me, they turned a blind eye,” said Madoff in an in-person interview in early May, at a federal prison in Butner, North Carolina.

    Madoff spent much of the two hours emphatically insisting the banks on Wall Street were complicit in his Ponzi scheme, but left him alone because he was a major client for them.

    “This is not a matter of taking my word for it, they (the authorities) don’t have to take my word for it,” he said.

    He specifically pointed fingers at J.P. Morgan Chase & Co. JPM +0.51% as a major culprit.

    1. Nobody Should Shed a Tear for JP Morgan Chase

      And while it is true that the federal government in this latest $13 billion settlement is ostensibly reserving the right to continue to pursue criminal charges, don't hold your breath. The arc of this story suggests that the whole purpose of this agreement has been to find the highest price Chase is willing to pay to a) stay in business b) keep employees out of jail.

      So again, $13 billion sounds like a lot of money. But Bernie Madoff is doing 150 years, and nobody in this cast of characters will personally pay a dollar in fines. Nobody will do one day in jail. That's a huge, huge discrepancy.

      Read more:

  3. What we need is "Obamahut". Everybody should be forced to buy a house.

  4. Why JPMorgan May be Getting off Easy

    While many headlines in the financial press accuse the government of conducting a witch hunt, Pulitzer Prize-winning New York Times columnist Gretchen Morgenson offers Bill a different perspective: “If the Justice Department were being tough on Wall Street they would be talking about bringing criminal cases against individuals who helped to perpetrate this immense crisis.” she said. Morgenson adds that the investigations into JPMorgan Chase show that it and many other financial institutions are still ‘too big to fail,’ which means taxpayers could once again be forced to bail them out.

  5. How to Make Money for Nothing Like Wall Street Credit default swaps might not be financial WMDs anymore, but Wall Street can still game them to make guaranteed profits.

    2. Sell so many CDS on a bond that you can pay to keep it from defaulting. This is like selling insurance to as many people as possible on a car that was obviously falling apart — and then paying to fix it before it could get in an accident.

    The problem with CDS is you can manipulate them to pay off, and you can manipulate them to not pay off.

    The first is what economists call the "empty creditor" hypothesis. When a company gets in trouble, a creditor normally has every incentive to voluntarily restructure a bond rather than have it involuntarily restructured in bankruptcy. Better to make the deal yourself than a judge, who will rank your claim against everyone else's. But say a creditor has CDS on its bonds. Then that creditor might get more money by refusing to restructure, and forcing the company into bankruptcy. That's a less elegant version of what Blackstone did. It added in the wrinkle of bribing the company to only briefly default on the specific bonds it held, rather than going through bankruptcy. But Blackstone did put the threat of bankruptcy very much on the table by saying it would call in the company's revolving loan if the company paid its bond on time. The second is basically an empty contract. You sell insurance on something, and then act to make sure that insurance never pays out. It's harder to do, because there aren't many bonds you can pay off yourself that are also crappy enough to sell enough insurance on. In either case, it's money for nothing.

    There's no such thing as too good be true on Wall Street.

  6. the difference between madoff and banks......madoff did not own politicians

    1. Executive At Center Of Bank Of America Mortgage Fraud Case Now Working For JPMorgan Chase

      Marione was found liable by the jury of one count of fraud for her conduct as an executive at Bank of America’s Countrywide unit. Her penalty has yet to be determined

      So while JPMorgan Chase negotiates to lower its fines and escape prosecution for the firm’s own fraudulent activities in the mortgage market, it is employing executives involved in mortgage fraud. Leading their home lending department no less! Something tells me JPMorgan Chase might not be turning over a new leaf.

      It is bad enough that because of weak regulations, a bailout culture, and poor enforcement Wall Street is incentivized to continue the kind of criminal behavior that led to the 2008 financial crisis. But now it seems the banksters have no trouble employing the very same people who caused that crisis.

      What ever happened to people getting banned from the securities industry if they were caught breaking the law?

  7. Dave, which dickhead is harassing you about your interpretation about accounting rules? I can't see this guy in the comment section of your article.

  8. I find the latest news from John Burns very interesting. Note the blindingly obvious contradiction in his assumptions for continued housing strength:

    “While we remain optimistic on the future of home prices and housing construction, our optimism is founded more on assumed low mortgage rates, solid economic growth, and low new home supply than it is on household income growth and solid demographics.”

    I'd like him to explain just how you get solid economic growth without household income growth? I think this will be key to the next leg down, as it's becoming more and more apparent that fewer people are benefiting from the recent uptrend. Basically the housing sector has succeeded in extracting more money out of middle class families' budgets, squeezing them yet again.

  9. ObamaCrony: Michelle Obama’s Princeton Classmate is Executive at Company that Built Obamacare Website

    Many people just don't think the left is as crony as the right. It is.The Daily Caller reports:

    First Lady Michelle Obama’s Princeton classmate is a top executive at the company that earned the contract to build the failed Obamacare website.

    Toni Townes-Whitley, Princeton class of ’85, is senior vice president at CGI Federal, which earned the no-bid contract to build the $678 million Obamacare enrollment website at CGI Federal is the U.S. arm of a Canadian company.

    Townes-Whitley and her Princeton classmate Michelle Obama are both members of the Association of Black Princeton Alumni.[...]

    As reported by the Washington Examiner in early October, the Department of Health and Human Services reviewed only CGI’s bid for the Obamacare account.

  10. WATCH: Jon Stewart Goes on Epic Smackdown Against CNBC,

    Published on Oct 24, 2013

    Jon Stewart does not often dip into the shenanigans of the financial world, but when he does, it's certainly something to see. And he set his sites Wednesday night on financial networks CNBC and Fox Business Network for their incredibly hyperbolic outrage over JP Morgan paying a settlement fine of $13 billion.