October ’18

The BAN Report: New Housing Slumping / Mortgage Credit Tight? / Tesla Profit Soars / Businesses Worried about Tariffs Says Fed-10/26/18

New Housing Slumping

The rate increases are having their intended effect, reducing new home sales, according to the latest data from September.

Sales of newly-constructed homes swooned to the lowest since December 2016. September’s selling pace of 553,000 was 5.5% lower than in August, and 13.2% lower than a year ago.

The median selling price in September was $320,000, 3.5% lower than a year ago. At the current pace of sales, it would take 7.1 months to exhaust available supply, a 6-year high.

The government’s reports on residential construction are based on small samples and often revised heavily, making it unwise to rely on data from any single month for the big picture. But the story so far in 2018 has been one of continuing deterioration. For the year to date, sales are just 3.5% higher than in the same period last year, a measurement that’s been falling steadily throughout the year.

For years, the housing story has been about strong demand, and limited supply. That dynamic may be starting to shift, however, as unrelenting price gains, higher mortgage rates, and scant choices may be nudging would-be homebuyers out of the market.

Zillow senior economist Aaron Terrazas partially blamed the September storms in the Southeast.

“It’s clear that home building faces a number of stubborn long-term headwinds, including the climbing costs of land, lumber and labor,” Terrazas continued. “While lumber costs retreated over the summer, they remain up nearly 20% over the past year and a half and are not likely to abate as rebuilding in the Carolinas begins in earnest. Construction labor costs are rising as well.”

 “Builders have not been building like they used to for some time now, and with winter coming, they appear to be in retreat even from those historically low levels,” Terrazas said. “The scourge of storms and higher construction costs aside, builders can read the early signs of a cooling housing market as well as anyone — including a slowing in home value growth, rising mortgage rates, and an uptick in price cuts.”

But, the National Association of Home Builders’ monthly confidence index rose this month and still stands at 68, which is still a bullish sign. So, this may be a temporary blip, caused by a slow adjustment to higher rates and tax reform. Prices need to drop further to offset the higher rates, or home affordability will wane.

Mortgage Credit Tight?

Many have argued that mortgage underwriting standards are too stringent and making home ownership too difficult for many. Others argue that there is plenty of credit availability.

Although credit definitely tightened in the immediate aftermath of the crisis, several data points show it has loosened considerably in the years since, and lenders on the ground portray a mortgage credit market with a diverse array of products for borrowers of varying financial backgrounds.

New regulations, such as underwriting requirements established by the Consumer Financial Protection Bureau, have probably made it harder to lend to borrowers with poor credit, but not impossible. And analysts say that while the affordability gap has gotten worse, that may be due to skyrocketing home prices more than anything else.

Data points to mortgage credit availability having taken a huge leap since 2012, in part because of access to low-down payment loans.

“If you look from 2012 to today, credit has gotten looser, particularly with respect to greater availability of low-down payment loans,” said Mike Fratantoni, chief economist and a senior vice president at the Mortgage Bankers Association.

Still, experts agree that following years of ballooning teaser rates and stated-income loans leading up to the 2008 meltdown, mortgage credit will likely never be as loose as it was back then — and that is a good thing.

We tend to agree that mortgage availability is sufficient. We asked Jerry Hubbard, President of FTN Financial, and he observed: “This notion that they have tightened the credit standards is wrong. They imply there is a common authority that is setting these rules when there’s not. You’ve got banks, credit unions, and mortgage companies that are working overtime to provide mortgage credit to borrowers. The day of the liar loan is over, but that should have never been there in the first place.”

What do you think?  Please send us your comments and thoughts to our attention.

Tesla Profit Soars

Tesla posted only its third quarterly profit in ‘Q3, shattering analyst estimates who predicted a loss.

Tesla shares soared by more than 12 percent after the company reported a surprise profit for the third quarter as CEO Elon Musk made good on his promise to start turning regular profits in the last half of the year.

The company’s earnings report, released after the markets closed Wednesday, also showed better-than expected car sales and a faster timeline on its Model 3 production. The electric car maker said its midsize Model 3 sedan, which it hopes to produce on mass scale, was the best-selling car in the U.S. when measured by revenue and the fifth best-selling car in terms of volume.

After one-time adjustments, Tesla earned $516 million during the quarter. It was Tesla’s third profitable quarter and compares with an adjusted loss of $520 million during the same period last year.

Musk previously said the company would become sustainably profitable by now, having had just two profitable quarters prior to Wednesday’s report since it went public in 2010. The company confirmed that it also expects to generate a profit during the fourth quarter.

Analysts predicted a 19-cent loss on $6.33 billion in sales, and Tesla earned $2.90 / share on $6.82 billion in sales. It’s rare that a company beats earnings that dramatically, but circumstances here are unique as many analysts were distrustful of its erratic CEO. Shares surged over 10% in trading Thursday.

Businesses Worried about Tariffs Says Fed

According to the Fed’s Beige Book, business are optimistic about growth, but worried about the impact on tariffs on the economy.

The majority of the Fed’s 12 districts reported modest to moderate economic growth at the beginning of fall, the Fed said in its latest roundup of anecdotal information about regional economic conditions known as the beige book. The report was based on data collected on or before Oct. 15 and highlighted uncertainties, particularly among manufacturers, regarding the impact of labor shortages and trade disputes.

The Trump administration has imposed tariffs on billions of dollars worth of imports, leading to retaliatory tariffs on U.S. goods.

For one trucking contact in the Cleveland Fed district, tariffs have meant price increases for pallet jacks, tires, and packaging material.

Many businesses have or expect to pass along tariff-related price increases to customers, but in some cases, are unable to, the report said.

It seems like the entire global economy is waiting for a resolution on the US / China trade dispute. Presidents Trump and Xi Jinping are scheduled to meet next month at the G-20 in Buenos Aires, but the US is refusing to resume trade negotiations unless China addresses Washington’s issues first. China and the US seem anxious to make a deal, so let’s hope we get some resolution by the end of the year.


The BAN Report: Big 4 Earnings / Lampert’s Terrible Bet / Jared’s Tax Losses / Bill Gates on Paul Allen-10/19/18

Big 4 Earnings
The four largest US banks released their earnings this week.   The largest banks enjoyed a solid quarter, benefiting so far from a higher rate environment.    
Bank of America
B of A had a solid quarter, beating estimates on revenue and profit.

The bank posted earnings per share of 66 cents, a 43 percent increase from a year earlier, exceeding the 62 cent estimate of analysts surveyed by Refinitiv. Revenue rose by a more modest 4 percent, to $22.8 billion, compared with the $22.67 billion estimate.

The bank’s provision for credit losses decreased by $118 million to $716 million, well below the $964.2 million estimate. Meanwhile, the bank managed to cut expenses 2 percent to $13.1 billion, matching analysts’ expectations.

“The credit commentary is really good,” Jeffery Harte, an analyst at Sandler O’Neill, said on CNBC’s “Squawk Box,” adding that the bank’s results were generally solid.

B of A is trying to freeze expenses for the next two years, mostly by cutting employees and closing branches.
Citigroup said its effective tax rate fell to 24 percent in the third quarter from 31 percent a year earlier. This helped its third-quarter profit grow by 21.8 percent on a year-over-year basis.
Net interest margin, a widely followed measure of bank profitability, clocked in at 2.7 percent, in line with expectations.
CEO Michael Corbat said the results also got a boost from 3 percent growth in loans and a 4 percent climb in deposits. Loans totaled $675 billion at the end of the quarter, while deposits tallied $1.005 trillion.
These gains, along with cost cuts across the board, helped Citigroup offset lackluster revenue for the company. Citigroup’s overall sales totaled $18.389 billion in the third quarter, slightly below estimates and roughly flat on a year-over-year basis.
The loan growth was a real positive, as Citigroup has struggled to grow loans as of late.   
Wells Fargo
Wells slightly missed earnings estimates, while barely beating revenue estimates.
Revenue of $21.9 billion slightly beat the average analyst forecast of $21.89 billion in a survey by Refinitiv. Earnings per share were $1.16 for the quarter, excluding costs for redeeming preferred shares. Analysts had expected earnings per share of $1.17, according to Refinitiv.
“These results reflect the transformational changes we’ve been making at Wells Fargo,” said CEO Tim Sloan on a conference call with analysts Friday morning.
Wells Fargo is working on cutting costs. In September, it announced plans to cut 5 percent to 10 percent of its workforce over the next three years as part of an ongoing turnaround plan. Wells employs 265,000 people. It said changing consumer behavior, including a preference for digital self-service options, is the reason for the cuts.
Executives on a conference call with analysts on Friday said the bank was “on target” to meet its expense reduction goals.
Since Wells can’t grow due to its regulatory problems, expense control is its primary lever.     Meanwhile, Elizabeth Warren sent a letter today to Fed Chairman Powell, urging its continued growth restriction “until the bank replaces CEO Tim Sloan with someone who is not deeply implicated in the bank’s misconduct.”  
JP Morgan Chase
JP Morgan Chase beat estimates on earnings and revenue, led by strong retail banking offsetting bond trading weakness.
The nation’s largest bank by assets reported that revenue rose 5 percent to $27.8 billion, versus the $27.5 billion average estimate of analysts surveyed by Refinitiv. Earnings per share rose 33 percent to $2.34, beating expectations for $2.25. 
Profit in the company’s biggest division, consumer banking, surged 60 percent to $4.09 billion as the bank benefited from growing deposits and rising interest rates, resulting in more interest income. The retail bank attracted a record amount of fresh money, Chief Executive Officer Jamie Dimon said in the earnings press release.
The company’s net interest margin, a widely-watched measure of profitability, rose 5 basis points from the previous quarter to 2.51 percentage points. That edged out the 2.50 percentage point estimate, showing that the bank is still capitalizing on the interest rate environment.
JP Morgan Chase is still optimistic on loan growth, projecting 6-7% for 2018.    As rates rise, yields on credit cards and other floating-rate consumer loans will continue to expand margins. 
Overall, another solid quarter for the banking industry, and still no sign that credit is deteriorating.
Lampert’s Terrible Bet
This week’s bankruptcy filing of Sears crystallizes the terrible investment Edward Lampert made in Sears, as he watched one large bet damage his reputation.  Not surprisingly, Mr. Lampert claims he was right about the future of retail.
Sears will now go down as one of the worst bets by a hedge-fund manager, shattering Mr. Lampert’s reputation after risking billions of dollars through his fund, ESL Investments, and more than a decade of his life.
Mr. Lampert, 56 years old, said in an interview last month that Sears’s collapse has taken a toll on him professionally and personally. “People have been trying to figure out why I haven’t given up or what’s in it for me,” he said. “I really believed this could be something special.”
His biggest disappointment, he said, was that Sears was unable to capitalize on his early insight that e-commerce would be a game-changer: “If we could play that game and play it well, we had a chance.”
Mr. Lampert still thinks he was right about where the retail world was headed and what Sears needed to do. In the interview, he said he did everything he could to keep the company afloat, even though some of his ideas backfired. He took on risk in lending the company money when others wouldn’t, he said. Hamstrung by years of losses and onerous pension obligations, he said, Sears simply lacked the funds to compete against Walmart Inc. and Amazon.com Inc.
“The world of retailing turned out as I had expected,” Mr. Lampert said. “If you had predicted the future relatively correctly and you still didn’t produce the outcome you wanted, that is different than not predicting correctly.”
Whitney Tilson had a different take.   
“He bet his entire career on one stock. What on earth does he know about running a retailer?” said Whitney Tilson, a former hedge-fund manager who closed his own fund in 2017 after poor returns. “It’s exhibit A of hedge-fund hubris. This is a case study I will teach in my seminars for years.”
By any objective measure, Eddie Lampert’s involvement in Sears was a disaster for everyone involved.     As CEO, he was an absentee leader, running the company from his home in Miami.    If he had such grand vision on the future direction of retail, then he certainly didn’t execute very well.    One good benefit of the bankruptcy filing is Mr. Lampert is no longer CEO.   Moreover, the self-dealing in which his hedge fund acquired some of the best assets of Sears could not have been good for the company.  
Jared’s Tax Losses
To paraphrase Steve Martin, you can be a millionaire and never pay taxes.   First, get a million dollars.   Then, buy real estate, and take advantage of the ability to expense the depreciation.    According to a New York Times analysis, which came about due to a gross violation of Gramm-Leach-Bliley, Jared Kushner has avoiding paying any federal income tax for years, despite a net worth of over $300MM.
Over the past decade, Jared Kushner’s family company has spent billions of dollars buying real estate. His personal stock investments have soared. His net worth has quintupled to almost $324 million.
And yet, for several years running, Mr. Kushner — President Trump’s son-in-law and a senior White House adviser — appears to have paid almost no federal income taxes, according to confidential financial documents reviewed by The New York Times.
His low tax bills are the result of a common tax-minimizing maneuver that, year after year, generated millions of dollars in losses for Mr. Kushner, according to the documents. But the losses were only on paper — Mr. Kushner and his company did not appear to actually lose any money. The losses were driven by depreciation, a tax benefit that lets real estate investors deduct a portion of the cost of their buildings from their taxable income every year.
In 2015, for example, Mr. Kushner took home $1.7 million in salary and investment gains. But those earnings were swamped by $8.3 million of losses, largely because of “significant depreciation” that Mr. Kushner and his company took on their real estate, according to the documents reviewed by The Times.
“If I had to live my life over again, I would have been in the real estate business,” said Jonathan Blattmachr, a well-known trusts and estates lawyer, now a principal at Pioneer Wealth Partners, who reviewed the Kushner documents. “It’s fantastic. You get tax deductions for things you don’t pay for.”
The source document in the story appears to be a net worth statement, most likely provided to a bank or non-bank lending institution.    His actual tax returns were not part of the story, so there may be some differences between what the net worth statement said, and the final tax obligations.    The fact that this document was leaked to a newspaper is remarkable, as the leaker committed a federal crime.    With respect to the substance of the article, it does appear that Mr. Kushner would have paid very little taxes if he had large depreciation expenses.   None of this is illegal though and this is exhibit A on why people invest in real estate.
Bill Gates on Paul Allen
Paul Allen, co-founder of Microsoft, passed away this week at 65 from non-Hodgkin’s lymphoma.    Bill Gates had a moving tribute in the Wall Street Journal.
I met Paul Allen when I was in 7th grade, and it changed my life.
I looked up to him right away. He was two years ahead of me in school, really tall, and proved to be a genius with computers. (Later, he also had a very cool beard, the type I could never pull off myself.) We bonded over the teletype that some students’ mothers had bought for the school and had connected to a remote mainframe.
Eventually we were spending just about all our free time messing around with any machine we could get our hands on. At an age when other high school kids were sneaking out of the house to go partying, Paul and I would sneak out at night to go use the computers in a lab at the University of Washington. It sounds geeky, and it was, but it was also a formative experience, and I’m not sure I would have had the courage to do it without Paul. I know it would have been a lot less fun. (“Borrowing” computer time illicitly would become something of a theme for us. Later, when I was a student at Harvard, I got in trouble for letting Paul use the campus computer lab without permission.)
As the first person I ever partnered with, Paul set a standard that few other people could meet. He had a wide-ranging mind and a special talent for explaining complicated subjects in a simple way. As an adult, he pursued a huge spectrum of interests, including the arts, conservation, and artificial intelligence. He wanted to prevent elephant poaching, promote smart cities, and accelerate brain research.
When I think about Paul, I remember a passionate man who held his family and friends dear. I also remember a brilliant technologist and philanthropist who wanted to accomplish great things, and did.
Paul deserved more time in life. He would have made the most of it. I will miss him tremendously.
The partnership between Bill Gates and Paul Allen should rival any partnership in business ever.    We can’t think of another one that comes to mind.

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