The Housing Deal From Hell

February 10, 2012

Close your eyes and imagine this scenario: social security payments cut by 1/3, 10% of employees fired, taxes raised on everyone (even those who don’t pay taxes), government services cut dramatically. How would the country respond? Turn on the news and look at what’s happening in Greece right now.

It seems that we are inching closer to a deal in Greece, yet each time the backlash is bigger than the prior backlash, and the deal terms then shift again. While the leadership of both sides continues to work towards a solution, the chorus calling for Greece leaving the Euro seems to be growing, and also coming from both sides. Given the Greek elections coming in April, it seems unlikely that the situation will be settled before the new leadership is determined.

A recent CFA Institute Member survey queried 1700 analysts about the valuation of Facebook. The poll asked whether Facebook is overvalued at a $100 billion market cap, and 91.6% of Chartered Financial Analysts (CFA) felt it was too high, while 5.1% thought it was about right, and 3.3% thought it was too low. After posting revenues of $3.7 billion and profit of $1 billion, a $100 billion market cap would value the company at 27 times sales. Google (GOOG), which posted sales growth of 29% in 2011 compared to Facebook’s 88%, is trading at five times sales. Apple (AAPL), which grew sales 66% last year, is trading at four times sales.

LinkedIn (LNKD) reported their 4^th quarter 2011 EPS last night and beat estimates handily. The company posted EPS growth of 100% on a 105% sales increase. The stock is up 10% this morning. Groupon (GRPN) posted its first earnings as a public company earlier in the week, missing EPS on better than expected sales. The stock has traded down 14% subsequent to the report.

Bill Gross, PIMCOs iconic bond manager, made a very public bet against US treasuries that hurt the firm’s relative returns last year and has led to significant asset outflows. Now Mr. Gross has altered his course and become bullish on US treasuries. Meanwhile, Warren Buffet has declared that US treasuries are the most dangerous investment in the world. It will be interesting to see which investing legend is correct.

The Bank of England announced another stimulus plan, this time for 50 billion pounds, which brings the total to 325 billion pounds. The BOE cited weaker than targeted inflation of less than 2% as justification for the additional stimulus.

According to bank analyst Dick Bove, the newly approved mortgage deal between the US government and domestic banks is the “mortgage deal from hell.” Bove further stated that “there is no sanctity of contracts in the US. Only fools meet their financial commitments. The non-payers are truly enlightened.” And people say I’m histrionic.

Wondering who benefits from "the deal?" If you over paid for your house, or you borrowed more than you could afford, relax, you're about to be taken care of by your neighbor. If you were responsible by borrowing what you could afford, fulfilled your contractual obligations by making all your payments, and have equity in your home, then bend over. If you are late on payments or in foreclosure, you're about to get a principal reduction on your mortgage or even some cash back. If you have equity in your home, shame on you for being responsible, you must be part of the 1%. I think that about sums it up.

Speaking of investor surveys, according to Investment News, 82% of US investors say they trust their financial advisors, while 30% trust Ben Bernanke, and 28% trust Barack Obama. Members of Congress are “distrusted strongly” by 68% of those polled.

According to Deutsche Bank, last week’s trading volume was the lowest since September 2011.

NPD is reporting that video game software sales for January were down 38% from last year. Hardware sales were down 35% from last year.

Have a great weekend

Ned