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Feature

Why the Housing Sector Collapse Is Wonderful

by

Porter Stansberry .

Barrington is a subdivision in northwest Charlotte, North Carolina. The houses in Barrington are "tract homes..." 

To save money, homebuilders like to develop entire neighborhoods of identical houses. Every house uses the same architecture, so they only need to draw up one set of blueprints. Every house uses the same materials, so they can buy materials in bulk and reduce waste. Construction is easy, too. Once you've put up one, you can build 1,000. So the developers don't need to hire skilled craftsmen to build these houses. They employ the same unskilled worker you'd find on a production line in Detroit. 

You'll hear people call these houses "cookie-cutter homes."

Beazer Homes developed the Barrington subdivision. They jammed the houses close together on tiny lots and used the cheapest designs they could find. These tactics reduced the final sales prices and increased Beazer's profits. Houses in Barrington started at only $90,000. 

Here's the thing, out of 107 homes in the Barrington, 41 are currently in default and will end up in foreclosure. Normally in North Carolina, fewer than 3% of home sales result in foreclosure. Something unusual happened here. 

Beazer arranged the mortgage financing for 37 out of the 41 homeowners who ended up in default.

As the Charlotte Observer discovered, Beazer's mortgage employees were making loans to people who couldn't possibly afford the homes. Beazer completed the neighborhood in November 2002. The first foreclosure occurred two months later. Agina Anderson was the second person to default in Barrington. Anderson lost her home a year later, in November 2003. She was a 19-year-old single mother, working at a gas station for $8.05 an hour.

Everyone, individually, is responsible for whatever debts he incurs. I don't think it's right to blame Beazer for any individual default, and I certainly don't think borrowers should have recourse to sue lenders for making loans. 

But look at the corporate culture Beazer established with these kinds of sales and mortgage policies. The company was essentially building a community it knew would fail. Putting so many very high-risk borrowers into one community meant, inevitably, the development would suffer a very high incidence of foreclosure. As a result, the value of the community would be destroyed.

By selling homes its buyers couldn't truly afford, the company was also inflating the sales and profit numbers it reported to shareholders. Worse, the company's culture of irresponsibility systematically destroyed the value of the company's brand and its reputation.

No one should have been surprised when the FBI began to investigate the company's mortgage practices, when the SEC followed with an accounting investigation, or when Beazer's chief accounting officer was fired in June. 

Like so many of its customers, Beazer itself wound up in default. Unable to file regular SEC-required quarterly reports because of its ongoing investigations, it violated its bond covenants. Rather than admit its default and seek to compromise with its bondholders, as happens regularly in these situations, Beazer sued its own bondholders, calling them "vulture investors" in court papers. Astoundingly, Beazer denied it had defaulted on the terms of its debt � despite readily apparent facts to the contrary.

Beazer recently settled out of court with its bondholders, paying them $12 per $1,000 to delay action on the default until next May, by which time the company should be able to file reports again with the SEC. The company also admitted it had, in fact, been in default. But the company's culture of dishonesty and fraudulent dealing has already wiped out many shareholders � the stock has fallen from $80 to $8.

I've spent a considerable amount of time in November researching shares of homebuilders, including Beazer. No, I'm not crazy.

If you want to be a great investor, you have to buy good companies when their prices are exceptionally attractive. You only get that chance with the best companies in the midst of a crisis. As an analyst, the collapse of the homebuilding sector is a wonderful challenge. Although I think many homebuilders will soon go bankrupt, at least a handful will survive.
And since all of these companies are now trading for more than 50% off their highs, it's probably not too soon to take a serious look.

Good investing,

Porter Stansberry

"Reprinted with permission from DailyWealth. Written by Dr. Steve Sjuggerud and Tom Dyson, DailyWealth is a free daily e-letter focusing on the world's best contrarian investment opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments. Click here for a free subscription."

Trading Education

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Trading Tip

The Ugliest Word in Trading and Investing

by D.R. Barton, Jr.

�Maturity of mind is the capacity to endure uncertainty.�

                                                                  -- John Finley

There is one concept that is so powerful that it makes every trader and investor, from the haggard professional, right down to the wet-behind-the-ears newbie tremble in their Crocs.

The same word strikes fear in the hearts of engineers, doctors, soldiers, scientists, ball players, weather forecasters and even lawyers.

It is at the heart of every discomfort you�ve ever felt when trading.

It is UNCERTAINTY.

Uncertainty is the thing that we, as humans, are least equipped to deal with.  And without a doubt, the one constant in every good or great trader that I�ve worked with is their ability to deal with uncertainty.  The good news for all of us is this:  there are many useful (i.e., successful) ways to deal with uncertainty and the havoc that it brings into the world of trading.

Why Uncertainty Is So Central

The markets can be characterized in many different ways.  One of the most useful ways that I�ve found is to understand the markets as the reflection of mass psychology.  A concept that I�ve coined is this:

�The market is not a problem to be solved; it is psychology to be understood.�

If I approach the markets in an effort to evoke �scientific certainty,� as one e-mailer put it, or to solve a mathematical equation, I�m setting myself up for disappointment.  The nature of the market continues to change, and it defies any effort to put it in a box. 

It�s much like understanding the actions of another person.  Even with my closest friends, the best I can do is to understand their tendencies, what they are likely to do in any given circumstance.  And how they react to the exact same stimulus may vary from time to time based on their current emotional state or other input that I can�t discern at the time.

Uncertainty is so important because it is perhaps the central controlling concept in our decision making process.  The greater the uncertainty, the tougher the decision; as uncertainty is removed, decisions become much simpler. 

Over the next few weeks we�re going to look at how traders deal with uncertainty and some useful tools that you can use to improve your trading.

We will look at quantifying uncertainty, ignoring it, transferring it and living with it.  And I would love to hear your stories on dealing with uncertainty.  If you�ve had an experience dealing with uncertainty that provided a great learning experience, a vexing question, or just a good belly laugh, please forward it to me at drbarton@iitm.com .  Let me know if I may use the story (either anonymously or credited) in a future article.

Great Trading!

D. R.

About D.R. Barton:  A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena where he is one of the most widely read and followed traders and analysts in the world.

He is a regularly featured guest analyst on both Report on Business TV,  and WTOP News Radio in Washington, D. C., and has been a guest analyst on Bloomberg Radio.  His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at drbarton@iitm.com.

 

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Melita's Inspirational Corner

Take the Time

by Melita Hunt

Are you a quintessential gift giver who takes the time to really think through what you are going to buy for your loved ones? Do you usually get it right in most cases and everyone loves what you give them? If so, then congratulations and you need read no further. If on the other hand, gift giving has become a burden for you or you just can�t seem to get it right, perhaps you should read on.

Do you have trouble buying or creating suitable gifts for people? Do you use excuses? Saying that you don�t get caught up in the commercialization? Or perhaps you say that you never know what to buy, or that you don�t have the time, or it�s easier for you to get someone else to handle it because you don�t like shopping?

Have you ever looked at someone you love and then realized that you screwed up? You can tell that they are actually sad or disappointed that you didn�t take the time to at least get them a little something? Or that what you got them was totally inappropriate, but was convenient for you?

And here�s the real whammy: �She/He doesn�t want anything. We stopped giving each other gifts years ago.� Ouch.

You see in most cases it isn�t about the gift, nor is it about the money spent. It is about the thoughtfulness. It is showing the person that you cared enough to put some time into them. This is especially important for those people who have love languages that revolve around quality time or gifts (see previous article about Love Languages) or for spouses that feel like you are �never there� or that you are always focused on your work, trading, etc. (hint hint: many of you probably are).

And if you truly cannot work it out for yourself, then just say the following to the recipient: �I want to get you a gift that you would really like and I need your help. Would you please think about it for a few days and write down 3 to 5 things that you would really like. Or tear pictures me pictures from a magazine or catalog. Then I�ll have some ideas and a much clearer picture of what I can get for you that would make you happy.�

It doesn�t mean that the element of surprise needs to be ruined, but I am primarily writing this piece as a reminder to those of you who are consistently getting the present thing �wrong� or are coming home with nothing. Often we find ourselves buying things that we like ourselves, wanting the other person to like it, rather than giving a gift that really suits them.

You know who you are, so just trust me on this.  And DO NOT ask them to buy it for themselves. Take the time to do it!!  

I remember when I was asked what I wanted for my birthday once, and I replied by giving the name of a specific record and a specific video (they weren�t CDs and DVDs back then). I was planning on getting it for myself, but I was excited that my friend had asked and was willing to track it down and get it. Yet when I received the gift, they had decided that I would probably like the one that THEY preferred instead because they thought it was much funnier. I didn�t. I appreciated the sentiment, but why ask me?

On the flipside, perhaps you are the one that never seems to get a decent gift? 

Well there is no harm in you making a list of things that you would really like, and perhaps you�ll be helping out the people that are trying to work out the right gift for you!

This subject is in the air, of course, because it is the holiday season and whether it�s Christmas, Hanukkah, a birthday, a wedding, a graduation or some other celebration, there is invariably some time in your life when you are going to have to give a gift to someone. So where do you honestly stand on the gift scale? Are you at the �I�m a genius at this� end, or does your family shrug and not expect anything from Scrooge McDuck? Perhaps you are at the happy in-between level � you don�t mind getting out your wallet, but you haven�t got a clue what to buy, so you just hand over cash.  

Regardless of where you stand, I would like to suggest that this year, you take a look at all of the beliefs that you have made up around gift giving. Are they really valid or are they excuses for bad behaviors or habits? Is there room for improvement? Have you set precedents in your house that everyone has to follow without a second thought? Has gift giving become too much or too little? Is gift giving all about money and buying? Or does it go much deeper than that?

If giving gifts is more of a burden than a joy, when did that happen? And remember to think this through. Don�t go blaming it on the advertising or something outside yourself. You are choosing it to be whatever it is for you.

Even if you don�t want to take the time to do shopping, at least take the time to think through what your beliefs are, and why you choose to believe them. There is no right or wrong answer; I am just asking whether the subject of gift giving has become unconscious to you. And if so, is it time for any changes?

By doing something a little different this year and going the extra mile, you may just find a whole new world of smiles and appreciation will open up around you.

Melita Hunt is the CEO of the Van Tharp Institute. If you would like to keep up with Melita�s progress regarding her recently diagnosed lung cancer. Please feel free to read her blog at www.myleftlung.com.

You can contact Melita at mel@iitm.com

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