Jim Rogers, who is by no means a card carrying bear, thinks the US housing market, and therefore homebuilder and investment bank stocks, still have further to fall. And the news of the last few days provides confirming data points.
First, this morning’s Wall Street Journal has as a page one story a news item that should be no news to anyone with an operating brain cell, namely that mortgage lenders have started restricting credit even to borrowers well above the subprime level:
Jittery home-mortgage lenders are cutting off credit or raising interest rates for a growing portion of Americans, extending well beyond the market for subprime loans for people with the weakest credit records….
Lenders say they are being forced to raise interest rates and stop offering certain loans because mortgage-bond investors have lost their appetite for a broad range of mortgages considered risky. That includes those dubbed Alt-A, a category between prime and subprime that often involves borrowers who don’t fully document their income or assets, or those buying investment properties….
Lenders are tightening standards and “raising rates like crazy,” said Melissa Cohn, chief executive of Manhattan Mortgage, a New York mortgage broker. She said Wells Fargo & Co. is charging 8% for a prime jumbo 30-year fixed-rate loan that carried a 6 7/8% rate late last week. (Jumbo loans are those too large to be sold to government-sponsored mortgage investors Fannie Mae and Freddie Mac.) A Wells spokesman said rates are lower on loans made directly by the bank than on those through brokers.
The market for mortgage-backed securities is “very panicked,” Michael Perry, chief executive of IndyMac Bancorp Inc., another big lender, said in a message on the lender’s Web site yesterday.
Earlier in the week, Barry Ritholtz pointed out, at Seeking Alpha, that the Case-Shlller Housing Composite showed the worst results since 1991:
Pretty amazing: This data release (May 2007) marks the 18th consecutive decline in growth, dating back to December 2005. As the chart below shows, annual returns of the Case Shiller Composite now show continued negative annual returns — an annual decline rate of 3.4%…..
“At a national level, declines in annual home price returns are showing no signs of a slowdown or turnaround,” says Robert J. Shiller, Chief Economist at MacroMarkets LLC. “Year-over-year price returns are continuing to either move deeper into negative territory or experience persistent diminishing returns. If there is any positive news in these numbers, it may be that in both May and April eight of the 20 markets showed positive monthly growth rates. This compares to only one or two of the 20 in the late winter and early spring. We need a few more months of data, however, to determine if this is the beginning of a national turnaround, since the national trend is still at a sharp deceleration.”
With Chicago now reporting negative annual returns, 15 of the 20 metro areas are now reporting negative annual price returns. In addition, 16 of the metro areas saw a decline in their annual growth rate compared to April’s data. Detroit continues to lead the metro areas in growth rate declines, down 11.1% from a year ago and has been in annual decline since May 2006 . . .
So Roger’s grim views should come as no surprise. From Bloomberg:
The U.S. subprime-market rout that wiped out $2.1 trillion from global share values last week has “got a long way to go,” said Jim Rogers, who predicted the start of the commodities rally in 1999.
This week’s rebound in equity markets hasn’t persuaded Rogers, 64, to pull out of bets that U.S. investment banks and homebuilders are heading for further declines.
“This was one of the biggest bubbles we’ve ever had in credit,” Rogers, chairman of New York-based Beeland Interests Inc., said in an interview from Hong Kong. “I have been and am still short the investment bankers in America. I’m also short homebuilders.”
The Morgan Stanley Capital International World Index plunged 5.3 percent last week, its worst weekly drop in five years, on concern defaults among subprime mortgages may be spilling over to other credit markets and hurting earnings and takeovers. Further losses may be in store even after the index, which tracks $32.6 trillion of stocks, advanced 0.7 percent this week.
“Given the stage of the credit cycle that we’re in now, we would have to expect more negative news popping up,” Beat Lenherr, who oversees $7 billion as chief investment officer for Asia at LGT Bank in Liechtenstein AG, said late yesterday in an interview in Singapore. “The market sentiment is a bit nervous to the degree that every bad news is answered with selling.”
No Big Disaster
Some investors say sustained consumer spending and jobs growth may help offset the impact of mortgage defaults.
A report due later today may show that payrolls rose 127,000 after a 132,000 gain in June, according to the median estimate of economists surveyed by Bloomberg. The jobless rate is forecast to hold at 4.5 percent for a fourth month, near a six-year low.
“Subprime will not derail the economy and we’re not calling for a big disaster,” said Hans Goetti, Singapore-based managing director at Citi Private Bank, which has assets of $100 billion in Asia. “Consumer spending will not fall off the cliff as a result.”
The MSCI World Index today climbed 0.1 percent, its fourth gain this week, as investors speculated that better-than- forecast earnings will help offset the impact of mortgage losses.
Financial Stocks Down
A measure of financial companies such as Countrywide Financial Corp. has dropped 3.7 percent so far this year, the only group to decline within the MSCI World Index. Countrywide Financial, the biggest U.S. mortgage lender, said yesterday it has “significant” sources of short-term funding after the slump in demand for loans pushed some rivals toward bankruptcy.
Shares of Bear Stearns Cos. fell 13 percent last week after two of its hedge funds failed because of the subprime crisis. Merrill Lynch & Co. is down 3.6 percent this week, heading for its third weekly decline, while stock in Lehman Brothers Holdings Inc. is 5.9 percent lower.
The housing slump may extend into 2008 because of stricter mortgage standards and a glut of properties. IndyMac Bancorp Inc. yesterday said it is joining rival lenders in making “very major changes” to home-loan standards and charging higher rates because of a slump in mortgage securities.
U.S. homebuilders rose yesterday, pushing a Standard & Poor’s index of 16 such companies to a 4.1 percent gain, the measure’s biggest advance in six months. The index has dropped 35 percent this year after the worst housing slump in 16 years left eight homebuilders nursing quarterly losses of $1.97 billion.
Beazer Homes USA Inc.’s stock jumped 14 percent yesterday, the most ever, after hedge fund Citadel Investment Group LLC almost doubled its stake in the homebuilder. The company has lost almost three-quarters of its market value this year.
“This is the only time in world history when people were able to buy houses with no money down and in fact, in some cases, the builders gave them money for a down payment,” Rogers said. “So this bubble is the worst we’ve had in housing and it’s going to be the worst before its over cleaning it out.”
China is a market that Rogers isn’t selling even as the fallout from subprime drag on share prices worldwide, he said. He’s sold his other emerging market holdings as stock gains outstripped the prospect for earnings, Rogers added.
“China’s the next great country in the world and we must learn about investing in China, because that’s where fantastic fortunes are going to be made in the next century,” Rogers said. “I would be looking at China very carefully.”
The CSI 300 Index last week jumped 8.4 percent. The index had gained 2.7 percent to a record as of 2 p.m. in Beijing, heading for its fourth weekly gain in a row. The benchmark has more than doubled this year and is the best performer among 89 stock indexes tracked by Bloomberg.
“I’m not of a mood to pronounce the end of the world just yet,” said Hans Kunnen, who helps manage $117 billion at Colonial First State Global Asset Management in Sydney. “You only have to go back three years to see how debt was being priced as if there was no risk at all. Well, there is risk, and it’s simply being priced back in.”